Boston — If people were asked to list their major goals, a comfortable, enjoyable retirement would almost certainly be on most lists. Reaching that goal, however, requires astute planning, consistent saving, and wise investing. In the United States, it also requires a knowledge of the tax laws and how those laws affect retirement-savings plans, and knowing what pension benefits to expect. Unfortunately, frequent changes in the tax laws and major changes in corporate America have made retirement planning based on taxes and pensions a difficult and sometimes uncertain proposition.
``There is no apparent national retirement policy,'' said Harry G. Graham, a lawyer with William M. Mercer-Meddinger-Hansen Inc., a benefits consulting firm. ``A hodgepodge of retirement policies has grown up over the years.'' That hodgepodge includes no fewer than four major tax bills in the last six years that have affected how individuals save for retirement or how businesses handle employee pensions.
Some of those changes came about because Congress did not anticipate the effect of earlier laws, says Mr. Graham, who was chief counsel on the Senate Finance Committee.
In 1981, he recalls, it was estimated that the expanded individual retirement account would cost the Treasury about $8 billion in lost revenues in the first year. But when 1982 figures were added up, the cost was closer to $18 billion. That's one reason last year's tax-reform law severely limited taxpayers' ability to deduct IRA contributions.
While the alteration may have been good for the Treasury, it was yet another case of people having their retirement-savings plans thrown out of whack. After all, banks, mutual funds, and insurance companies had printed all those tables showing how much people would have at retirement if they simply put away $2,000 a year. The tables being printed now show considerably smaller figures. The changing pension
Meanwhile, the once-reliable company pension is becoming a thing of the past. Companies looking for sudden infusions of cash have ``terminated'' their defined benefit pension plans (which guaranteed a certain retirement benefit based on years of service) in favor of defined contribution plans (where the employee contributes part of his or her wages to a retirement fund).
Other companies, fed up with the frequent changes in tax laws and pension regulations, have scrapped their pension plans altogether, leaving employees on their own to save for retirement.
Company mergers have also taken their toll. New corporate owners may not have as generous a pension plan as the acquired company had, which throws more uncertainty into the workers' planning process. And when mergers, bankruptcies, and cost-cutting result in layoffs, many employees find they haven't been able to build up enough time to get the full benefits.
Finally, many of the jobs being created today are in service-oriented businesses or part-time or temporary work, where there may be no benefits of any kind - insurance, vacations, or pensions.
``Companies are making greater use of part-time employees,'' Graham says. ``Small businesses are really getting away from having retirement plans.'' Lingering inflation questions
All this has left many future retirees wondering where their retirement income is going to come from, and how long it will last once they retire and have to deal with inflation and fixed incomes.
``Many of the concerns that people have are well founded,'' said Donald Schuette, a professor of actuarial sciences at the University of Wisconsin Business School. ``But the big unknown in all of this is inflation. People say, `I could retire if I could be sure inflation wouldn't run away again.'''
While inflation has been relatively tame in recent years, staying under 5 percent most of the time, the memories of double-digit inflation in the late 1970s are fresh.
One result of concern about inflation, Dr. Schuette notes, is that many people are working longer. While this is good for those who can still put in many productive years after their 65th birthday, ``some people continue to work longer than perhaps they should,'' he says.
``Some people say you only need 60 percent of your pre-retirement income to retire,'' says Flora Williams, a family economist at Purdue University. ``But that assumes no inflation.'' Since that isn't going to happen, she suggests that people estimate how much they are going to need to live on, then make an estimate for inflation. While that may seem risky, Dr. Williams points out that over the last 20 or 30 years, the average inflation rate has been about 6 percent a year, even with the late 1970s figured in.
A key to having enough to live on in retirement, Williams says, is knowing what kind of life style you'll have. Many job-related expenses, she notes, may be reduced or eliminated, like commuting costs, daily parking fees, clothes, and lunches. But other expenses might increase, such as travel, gifts or activities with relatives - especially grandchildren - and perhaps health care. Long-term plans, short-term execution
After looking at as many possible expenses as you can, figure out how much money will be coming in and where it will come from: pensions, social security, annuities, individual retirement accounts, savings, or investments. Also figure out how much income those sources could provide if you didn't touch the principal.
It's not necessary to be within five years of retirement to go through this exercise. You can start the projections at any time by making assumptions about how much you'll have in a pension (assuming your company has one and you stay long enough to vest, or qualify for benefits), and how much you'll be able to save in an IRA or an employer-sponsored 401(k) or 403(b) savings plan.
The growing uncertainty about tax policy, company pensions, and social security, however, makes it all but impossible for anyone to look too far ahead - say, 20 or 25 years - and make retirement income and spending projections and stick to a savings plan throughout that time.
``Anything going out more than 25 years will not be useful,'' says John Cahill, a financial planner in San Francisco. ``But if you think about three or four years down the road, you can do much better.'' So while long-range goals can be laid out, getting to those goals should be done in three- to four-year steps, making adjustments to account for new tax laws, higher inflation, a better-than-expected (or worse) return on investments, or a higher salary.
``You have to constantly monitor the plan and make adjustments,'' Mr. Cahill says. ``You have to stay flexible.''