Martha M. Hamilton

Thursday, September 30, 1999, at 11 a.m.

Welcome. I'm Martha Hamilton and our guest today is Martha Priddy Patterson, director of employee benefits policy and analysis for the compensation and benefits practice at KPMG, one of the nation's leading accounting firms.

Ms. Patterson advises companies on designing retirement and other plans, and she has focused particularly on how women can ensure themselves a decent retirement income.

Martha Patterson

She is the author of "The New Working Woman's Guide to Retirement Planning: Saving and Investing Now for a Secure Future," soon to be released by the University of Pennsylvania Press. She also has been a delegate to the National Summit on Retirement, hosted by the White House and the Congressional leadership.

Ms. Patterson is NOT a financial planner, but she would be happy to answer your general questions about planning for retirement.

Submit questions early!

Martha M. Hamilton: Good morning. There seems to be an inexhaustible number of questions on this subject, so we'll start right away and handle as many of them as we can, so don't hesitate to send yours. In fact, we're going to start a little early since we have so many questions.

Bethesda, MD: Hello, thanks for taking my question. I'd like your opinion about the conflicting estimates for the amount a single woman needs to retire. Jane Bryant Quinn said last Sun. in the Post that automatic Web estimators overstate the amount. On the other hand, Julius Westheimer on WBAL-TV says it will take $800,000 in resources to replace a $40,000 earned income. Who's right?

--Susan

Martha Priddy Patterson: How much you need to save for retirement is directly linked to how much you want to spend in retirement. First, you need to estimate how much you will need in retirement. Start with how much you spend now. Recognize you will spend more for medical expenses as you age and, even mild inflation will reduce the buying power of your savings. Also, be sure you know how much you can expect from Social Security. This should be easier since in the near future the Social Security Administration will be sending you an estimate of what you can expect your social security benefits to be

Martha M. Hamilton: After Ms. Patterson mentioned this to me in the course of putting together our Sunday Business section on financial planning for retirement, I got my own estimates from Social Security. It was painless and gave me a much better sense of what to expect.

st. louis,mo: Hi Martha,
I am a data entry clerk making $17,000 per year. What type of saving plan should I start and how much will I need to start it?

Martha Priddy Patterson: Use an automatic savings plan. Somehow, if you don't get your hands on the money, you don't seem to miss it. Start with about 5% of your pay and if that's too much, reduce it. If your employer has a 401(K)plan, use that. There may be a matching contribution from your employer. If no employer plan, see if your employer will automatically transfer money to a savings account. Or see if the bank will take money out of your checking account each month.

Martha M. Hamilton: Automatic deposits into a savings account helps, but only if you have enough discipline to keep from dipping into savings for daily expenses. I wish I could say I have that kind of discipline.

Washington, D.C.: I'm submitting this early and hope you can get to it.

I'm self-employed -independent contractor--like lots of folks these days!!- and so I don't have a 401K at the moment -and haven't for the last 3 years or so since I've been in this position.- I'm a 26 -almost 27- year-old single woman and I opened up a ROTH IRA last year, but only have saved about $2000 so far. I contribute $100 a month and the fund is invested in high growth-risk stocks.

I think I'll probably be an independent contractor for about another year and then plan on getting a job w-benefits. What do you suggest I do in the next year or so to further plan for retirement aside from contributing to my ROTH... to make up for the fact that I have no 401K.

I'm paying off some credit card debt and should be debt free by the end of the year. Then, I'll have about $1500 or so in disposable income a month to work with. I'd also like to start saving for a house! Thanks so much for your help.

PS: Can I contribute more than $2000 a year to my IRA since it's a ROTH?

Martha Priddy Patterson: First, good work on starting early! You can only put in $2,000 in the Roth IRA. Continue using the Roth IRA up to the $2,000 limit each year. Then think about a Keogh plan, which is used for self-employed people such as independent contractors. Depending on which type of plan you choose, you can put up to 20% of your self employment income in the Keogh each year. However, don't save for your house in the Keogh account, which can only be used for retirement or disability. You may be able use part of your Roth without penalty if you are a first time homebuyer.

Washington, DC: If you retire and select a survivor's annuity, particularly if the recepient is a minor or young adult, how long will that person be able to collect the annuity after you expire? Isn't there some sort of calculation to insure that the person will receive at least what you would have been expected to collect?

Martha Priddy Patterson: It depends on the retirement plan and the type of annuity you choose. Talk this over carefully with someone at your employer's human resources office who knows the plan well. If the annuity is a "joint and survivor annuity," generally the payments last for the life of the survivor.

Washington, DC: I am a 24 year old professional and I keep hearing about Roth IRAs. I know it is something good to have, but don't know much about them or how to go about opening one. Can you supply me with a brief explanation of one and information on how to open one?

Martha Priddy Patterson: Roth IRAs are individual retirement accounts that you fund with after tax dollars; you don't get a deduction for the amount contributed but the amounts earned in your Roth IRA are not taxed when you withdraw them after you are age 59 and1/2, are disabled or die. You may be able able to use them without penalty for a few other purposes. You must have had the Roth IRA for five years to avoid a 25% early withdrawal penalty. Those earning more than $95,000 if single or more than $150,000 are eligible for Roth IRAs. Almost any bank, mutual fund, insurance company, or stock broker will set up a Roth IRA for you, generally for a small or no fee.

Martha M. Hamilton: We've had lots of questions about Roth IRAs. Because they're so new, they're not yet well understood.

Martha Priddy Patterson: Lousy typing in my last response to the 24 year old in DC. I left out "NOT"; You are NOT elgible for a Roth IRA if you earn more than $95,000 as a single or $150,000 for couples. Sorry!

Martha M. Hamilton: Those darned typewriters!

Martha M. Hamilton: We've got about half an hour left to answer more questions.

arlington, VA: Isn't how much money you need for retirement a function of how you feel about money? That is, some people never have enough and some people always have enough. Or is there a rule of thumb of how much you need?

Martha Priddy Patterson: You are correct that there is no rule of thumb about how much you need for retirement; as with the rest of your life and money, how much you need in retirement depends a great deal on how much you want to spend. Generally, think about what you spend while working and actually add a litte more for your early years of retirement for all those things you want to do --travel, etc. For the later years, you may be spending less on everything other than medical expenses, which will increase.

Glover Park DC: Just read your response to another Roth IRA question. Didn't you mean to say that those with incomes over $95,000 if single and $150,000 if married are NOT eligible for ROTH? That's what I understood to be the case.

Martha Priddy Patterson: Yes, you are correct, I left out "NOT". One is NOt eligible for a Roth IRA if your income is $95,000 if single or $150,000 if married.

Washington DC: I want to retire early - before reaching 59 and a half. What are my options for 401-k- and IRA withdrawls?

Martha Priddy Patterson: To avoid the 10% early retirement penalty for retirement plan withdrawals from IRAs, you can take distributions based on your life expectancy. The catch here is that once you begin those withdrawals you must continue to take at least that amount each year for a fixed period. For your 401(k), if you formally retire as early as age 55 you can begin withdrawals without the 10% after "retirement" even though you are not yet 59 and 1/2 or you can use the same method used for IRAs and withdraw minimum amount year over your expected life.

Martha M. Hamilton: We've got 15 more minutes.

State College, PA: My husband and I are concerned, not just about income -we have TIAA-CREF-, but about tax bites. Do you know of any good comparative guides to state taxes on pensions, annuities, and intangibles? We have had trouble locating any such thing. Thanks.

Martha Priddy Patterson: A couple of the financial magazines offer an annual run down of the tax liability in all of the states. (Personal Finance from Kiplingers and Money have in the past.) Also check with AARP and with the National Association of Retired Federal Employees. Also note that many states exempt pension income or a portion of pension income and offer reduced real estate taxes for those over age 65. But beware, state tax rates and laws can always change. Increased costs from an influx of out-of-staters sometimes drive the tax increase.

Silver Spring, MD: I have a question of social security. I was told that the last few years of your salary will be very important on determining how much you'll get from social security. That's why some people won't take a lower-paid job after they lost a better-paid job. Is that true?

Martha Priddy Patterson: Social Security looks at the highest 35 years of earnings, based on a 40 year career. People say the last few years are important simply because for most people those are the highest paying years. Also many workers, especially women, don't have 35 years of earnings, so the "last years" are very important to avoid very low payments. From the view of Social Security payments, the only reasons not work at lower paying job toward the end of your career is if you have done the calculation and know that you will not receive a higher benefit because you have already earned the right to a maximum Social Security benefit (this may apply to those who have always earned the maximum Social Security wage base) or if you are between 62 and 70 and considering applying for benefits early. In that case, Social Security benefits may be reduced to the point that your earnings, even though small, eliminate all of your Social Security benefits.

Rockville, MD: Not so much a question as a comment. I am a fairly astute single woman of 48 putting away approximately 10% of my net income each year. Since I live a fairly frugal lifestyle now I have no reason to think I'll get extravagant in my retirement. Whenever I've used the retirement calculators, I fear they think I live extravagantly now and will have to live with only 70%-80% of this wealth. Since I'll have a paid off house, car, and no college tuition to worry about, my expenses should be minimal. My only concern, as you readily point out, is my medical expenses. I'm healthy now. But with millions of my generation of baby boomers aging at the same time, it's hard to say how private insurers or the government will choose to care for us.

Martha Priddy Patterson: You are absolutely correct regarding medical expenses. Over the last two decades medical expense inflation has ranged from over 14% per year to 2%, so it is impossible to say how much medical expenses will be 20 and 30 years from now.

Martha M. Hamilton: We're almost out of time, but let's try to get one more question and answer in before we quit.

Washington, DC: I am a single women without children and I've had several problems with being laid off so as to each time I save I end up spending due to the need to survive. I now have a steady job after temping for one -1- year straight, but my question is how would I began to save for retirement?

Martha Priddy Patterson: Sometimes there just isn't enough money. Plan for layoffs. That sounds ridiculous, but we all know they can happen. Save a little more than you think you can during the working periods; save automatically and to put half the money in an IRA. Because that money is locked up, you may be able to avoid touching it when a layoff occurs. Even if you must, take only the amount you need out. Keep the rest in the IRA.

Martha M. Hamilton: That's the final word. Thanks so much to Martha Priddy Patterson and to all of you who joined us.

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