Retirement Planning

As a self-employed teacher, -you- must secure your retirement. No one else is going to do it for you, not even your dear old Uncle Sam!

Retirement planners advise to estimate that maintaining your present standard of living during retirement will require 60%-80% of your present income. (Cost reduction stems from elimination of business expenses such as wardrobe, meals out, commuting expenses, etc. Since many music teachers teach in their homes and in comfortable clothes, at retirement, they won't experience such a drop in expenses. For us, the conservative 80% is probably more prudent.)

Your retirement income will not come only from savings. Don't forget Social Security (we will hope that it is still around in some useable form by the time we are old enough to collect!) and a spouse's retirement benefits. If you own a home, you can sell it and invest the proceeds; or receive a lump sum or a monthly check by taking out a "reverse mortgage."

Music teachers also have a secret weapon: they don't have to retire. They can simply teach a reduced load to supplement retirement funds. After all, in order to teach, other than being able to think and hear clearly, you need only get to the instrument, hold a pencil, and talk.

The amount of money you will need depends in large part on your age at retirement. Early retirement requires more savings - and greater sacrifice during the working years - than retirement at a normal retirement age. If you want to retire at age 55, for example, retirement planners say to put away at lest 25% of your pre-tax income each year. Even at age 65 for retirement, that's still 20-25 years of living off your savings, since we're all living longer.

Staring early is the other key factor. Start saving early because building wealth takes time. Teachers in their 20s should try to salt away $100 a month. Invested at 5%, at age 65, money saved beginning at age 20 will have grown to $202,644. A nice sum. But if invested at 10%, at age 65, that $100/mo. will have mushroomed to over a million dollars ($1,048,250)!

The reason is compound interest.

Ok, where can you get 10%? Probably the stock market is the only place. The history of the market suggests that over 20 years, the average annual return will be about 10%.

Of course, the stock market doesn't rise every year. On average, every third year it falls. Overall, though, the stock market shows a steady rise, especially over a long period of time. And a long period of time is what we're looking at.

Any money needed for short-term goals (3-4 years), probably shouldn't be kept in stocks. Those funds probably belong in something very stable, such as a US Treasury security.

When choosing your investment vehicle - stocks, a mutual fund, etc. - remember that there is no such thing as a free lunch. If it sounds to good to be true, it is! The person/company offering the item might be in grave danger of going belly-up (and thus needs incoming cash quickly, from whatever claim it takes) or it might be an out-and-out scam.

Other tips:

In retirement savings and investment, the goal is not quick profits. Leave that to risk-taking speculators or the idle rich who have time to dabble in the stock market as a hobby. What you're after is wealth. And that takes a long time to build.

copyright 1998, Martha Beth Lewis, Ph.D.
Contact me about reprint permission.

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