Planned Retirement without Worry

Secure from worldly chances and mishaps.—SHAKESPEARE

INTRODUCTION

"Old Pete," as Peter Charles of Pilot Hill was affectionately known, was about to retire from his position as stationmaster in this small west­ern town. He was now sixty-five years of age and had worked for the railroad for thirty-five of those years, so that he was entitled to a pension which, coupled with the fact that his little home was owned outright, would be sufficient for his modest needs. Old Pete was known to everyone in the community, especially the children; for he had been the moving spirit to build and equip the only playground in town. Hearing of his impending retirement many people wanted to do something for the old man, so they made up a purse of over twenty dollars. When pre­sented with this token of esteem of the commu­nity and on being asked what he intended doing with the money, Pete said he would go to the lo­cal furniture shop and buy the best and most comfortable straight-backed chair, with a rocker to match "to get caught up on my settin' and my rockin'!" Pete seemed very happy, but his im­pending retirement had brought him two anxi­eties—his health and the purchasing power of the dollar. The former might not cause him too much worry, since Doc said he was as sound as a rock; the latter was simply a crisis in the lives of all retirement-bound elderly folks—a dollar whose purchasing power had suffered slow and relentless erosion; inflation had arrived for Old Pete.

The above brief sketch is an occurrence now taking place daily. Fifty years ago the outlook for older citizens was indeed bleak and uninviting. Lacking sufficient financial resources, these elderly people were for the most part dependent upon their own relatives, while in extreme cases there was always the poor farm, a shabby institu­tion usually maintained by the county and pro­viding only the bare necessities of life.

During the Great Depression of the thirties the plight of the senior citizens, and also of a large proportion of the unemployed, became acute. Legislation was framed, introduced, and finally passed. Old Age and Survivorship In­surance had become a reality. One aspect of its operations will bear further scrutiny.

PLANNED RETIREMENT

What is not generally known about OASI is that it was not designed to provide a complete and sufficient series of payments to permit "liv­ing off retirement income"; it was designed to prevent dependency and destitution and also to assist the unfortunate widow in the rearing of her children. The implication here is that the citizen should and must have practiced at least some measure of thrift, so as to have accumu­lated at least a small amount of supplementary financial backing of his own. This should have taken the form of a home owned outright, or perhaps other income obtained by proper plan­ning and farsighted investment.

It is this latter aspect with which we are here concerned, for the man of fifty becomes less and less concerned with capital gains and more and more with income as he grows older and faces eventual retirement. We will assume that Mr. John Q. Citizen, having arrived at middle age, his children now being married and on their own, and being a future member of some retire­ment system (OASI, railroad, steel, state, teach­ers, etc.) realizes that it is now time to plan the ways and means by which he and his wife may look forward to a dignified and happy span of later years; in other words, we propose to ex­plore the realm of planned retirement, wherein we shall carefully consider the investment ob­jectives of future retirement and shall show that these are very much different from those of a younger person; studies show that the principal objective of the latter is capital appreciation (capital gains).

SAVING AND PLANNING

This the heart of any retirement program, for the program cannot be put entirely into effect unless: (a) systematic saving in some form has been practiced; (b) farsightedness has been em­ployed so as to ascertain future financial needs and how to meet them.

It has often been remarked that there are many people who find it very difficult to save regularly. It is for them in particular that we suggest the use of some "forceful" savings ar­rangement. This may take one of the following forms: (a) automatic bank savings, whereby the bank will periodically transfer a certain amount from the commercial into the savings account; (b) regular purchase of U. S. Savings Bonds, perhaps by pay-roll deduction; (c) regular pur­chase of other bonds and/or stocks, to be dis­cussed later; (d) purchase of an annuity, even by installments. It must be emphasized at this point that the wherewithal for carrying out planned retirement without worry is money and the way to save money is to accumulate it in some form or other and surrounding it by a re­straining wall so as to prevent its use for any other purpose than that for which it was origi­nally intended. Social security or other pension plans are made possible by enforced deductions from pay-roll checks. Should you want more than this minimum, then you must also provide some form of enforced deduction which will not be left to chance. Remember that once retirement age has been reached the regular pay check for services rendered will cease; saving then be­comes virtually impossible and is almost point­less because "you can't take it with you"! Sys­tematic saving is a must for all who plan for the future intelligently. When retirement time is reached assets must be left entirely intact so that they will continue to produce supplementary in­come.

It is true that the ownership of a home repre­sents a saving which is very worth while and gives one a feeling of security, but there is likely to be a need for somewhat more than just a home owned in fee plus some single pension plan or O.A.S.I.; indeed, this may spell the dif­ference between living and just existing. There are always a few things we may need from time to time to make the twilight of a lifetime more pleasant; it would indeed be a sad state of affairs if they could not be had because of lack of funds. Many people have looked forward to travel in their later years, largely because they had not the time or the funds to do it earlier; some want books, art objects, or other finer things of life; still others want a change of environment, per­haps including that "little cottage in the coun­try"; some have never owned property and now want this outright ownership as a means of mak­ing retirement income reach further. Regardless of objectives the fact remains that many pro­spective pensioners may find a supplementary income very welcome. It could be obtained by a rigid program of regular deposits in a savings bank, but there are drawbacks to such a plan; the most important of them is the failure to re­alize that the funds are not well enough safe­guarded against a personal raid; in other words, it is too easy to take a pass book and go to the bank and withdraw some of the accumulations. Let us investigate other means of achieving this objective. We will suppose that our citizen has reached fifty years of age and now becomes aware of retirement effective at age 60 or 65. He realizes that whatever pension plan he holds membership in is not in itself quite sufficient for his future needs. He has a choice of three things to do, any one of which may prove sufficient, but we hasten to add that he may participate in more than one of them, provided that his cur­rent income and investments permit.

GOVERNMENT BONDS

United States Savings Bonds may be purchased regularly by pay-roll deduction. They present a very high degree o£ safety and provide a com­pounding of interest feature which is valuable. Recent changes in their characteristics provide that they need not be redeemed at the expi­ration of their normal period, but may remain untouched for an additional period. Still an­other alternative is to exchange them for gov­ernment bonds which will provide regular in­terest payments semiannually. This means that our citizen of fifty may embark upon a program of regular purchase of these bonds with the ex­pectation that those purchased in the beginning may be left undisturbed until the retirement date approaches. They may be exchanged or even be redeemed and the funds then utilized to purchase a cash annuity, bonds and/or stocks, all thus providing supplementary income of an amount as desired. Should the retiring citizen so desire he may withhold a portion of the re­demption proceeds as a cash reserve. We empha­size again that the purchase of these bonds and/or their redemption involves no commis­sions or charges, since banks sell and redeem them; from this point of view they have much to recommend them to those persons who have an aversion to complicated business transactions.

We often hear the stated objection that such bonds do not guard against inflation. Granted— but neither do any fixed-dollar obligation, as we have remarked before. Even cash put into a strongbox is subject to the same inflationary trends. While the inroads of inflation are to be deplored, there is no dodging the fact that we cannot entirely avoid them. Nevertheless, the purchase of U. S. Savings Bonds combines saving with investment in a simple and very attractive package deserving of serious consideration.

As a "painless" way to provide future addi­tional income it would seem that this expedient might easily be a part of the planned retirement of many; besides, the purchase of an annuity is desirable, as we make clear in a later section.

BONDS AND STOCKS

Carefully selected and regularly purchased stocks and bonds may also provide supplementary retirement income, but care in selection must be employed in order to provide protection for invested capital coupled with a reasonable rate of return. Long-term capital gains, while a desirable objective, are no longer paramount and must be considered entirely incidental. The prime purpose is to build an estate which will provide the necessary wherewithal in some measure to guarantee a comfortable later life. The following information may be of value:

(a)    Bonds should be carefully selected so as to provide adequate protection plus a suitable return. While there is no question that the bonds classed as Aaa and Aa (Moody rating) are, practically speaking, beyond reproach, it is also true that such bonds will naturally offer a very minimum in the way of income. At this writing the yield of ten highest grade bonds was 4.6 per cent. In contrast with these bonds the return upon high grade (Aa) was 5.0 per cent, while medium  (A and Baa) bonds returned nearly 5.5 per cent. This would indicate that the investor may well consider medium ratings as a basis, since the lowest rating here considered (Baa) involves very slight speculative characteristics. As an added protection, investment should be diversified so that each bond of lower grade should be offset by another of higher grade. All should preferably be of long-term obligations, so as to provide for continuous return and this without threat of interruption or the need of reinvestment.
(b)   Stocks should be of good grade, perhaps with strong emphasis upon the public utilities (electric power, natural-gas distribution, water, and telephone), since there are numerous ex­amples of such stocks which have paid uninter­rupted dividends for several decades. High-grade preferred stocks may also be considered although the same money is better placed in bonds. Some good-grade common stocks (in­dustrials) may also be bought; they need not be "blue chips," which are often overpriced, but could be some of those corporations which are not "giants" and at the same time show a long and continuous record of earnings and dividends.

Such stocks are sometimes termed "pale blue chips" and often are rewarding be­cause moderate capital appreciation often ac­companies  their  further growth.  Should  this take place they may be sold and the profits rein­vested in similar or other media.

The principal objective of older persons is no longer enhancement of capital, as before stated. Safety of principal, coupled with assured and steady income, must be the watchword. Well-chosen defensive stocks may well be included, because at least some part of the portfolio must be designed to combat the possibilities of future inflation. Defensive equities have another vir­tue: since demand is fairly constant and growth is largely coupled to population increase, such equities tend to rise less and also decline less than the general market. This is largely due to the over-all stability of earnings, since it is earn­ings which largely govern price in the market place, and it is earnings which in turn produce dividends.

One additional caution: this is no time for speculation and the preceding paragraphs are pointed toward investment alone as the para­mount objective.

ANNUITIES

Annuity purchases are the most desirable method of obtaining extra income over and above that provided by pension funds. Since they are handled by life-insurance companies, whose business is closely supervised, they are virtually without risk. In 1956 there were over one million annuity contracts in force, provid­ing close to half a million dollars in annual in­come; at the same time over 32 million de­ferred annuity contracts were in force, providing deferred income of over a billion dollars. The growing interest of American families in pro­viding for the future is to be seen in the grand total of over 5 million annuity units owned, while reserves guaranteeing future payment totaled $16.3 billion.

The most valuable feature of the outright purchase of an annuity is obviously that of cer­tain income and this is the chief concern of the retiring individual. Furthermore, there are a wide variety of types from which to make one's choice. As the time comes when provision for future retirement becomes important (say at age 50) it is obvious that the need of a heavy protection by life insurance is much reduced, so that the protection of the annuitant for future years has increasing importance. Many life-in­surance policies carry a cash surrender value and may thus be exchanged for an annuity; oth­ers, such as the endowment policy, will provide a certain return of the principal amount pro­vided that the insured lives out the insurance term, and these proceeds may then rightfully be utilized to purchase an annuity.

The determination of the exact type of an­nuity is not to be treated lightly. Much depends upon the future need and circumstances of the annuitant. A single person might well purchase a life annuity, the payments ceasing at death; a married couple would naturally be interested in the "joint and survivorship" type, since this pro­vides that after the death of one party the other (spouse) will continue to receive the remaining payments.

Without doubt the purchase of an annuity is the simplest way to solve the problem of supple­mentary retirement income. Previous sections have shown a number of ways by which the nec­essary funds may be accumulated; the actual se­lection by type should be made with the aid of the agent of a company which writes such con­tracts.

CONCLUSION

In summary we may say to J. Q. Citizen:

1. Become conscious of the retirement prob-lem at least at the age of fifty.
2. Be willing to save toward retirement and do not leave everything to chance with the thought that your prime retirement plan will take care of everything. You do not know this to be true! Indeed, the inroads of inflation,  coupled with  the  seriously reduced purchasing power of the dollar, may cause a very painful awakening and it will then be too late!
3. Get advice! Much of it is free, and your lawyer,  broker,   insurance  agent,  and/or banker will charge little for helping you achieve future peace of mind.
4. Save regularly, even to the extent of setting up a "special account," in the hands of either a bank or a broker, the sole purpose of which is to provide for supplementary retirement income.

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