MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE:What will retirement mean?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

My wife and I are aging. I won't tell you our ages, especially hers. But suffice it to say, we're now well past the half-century mark.

After teaching her 32 nd year of elementary school, my wife says “that's enough.” She'll retire after this school year. Although I plan to continue working for the foreseeable future, her decision has caused us to think much more about retirement.

Of course, there are a number of important issues to address in retirement that span psychological, sociological, medical, legal and financial elements. As an economist, I'll only touch on the last one.

For most of our nation's history, retirement usually meant poverty. Retirement means an end to paid work, and without the earnings from work, many retired people barely got by.

Fortunately, this no longer is the case. Although retired households have less income than other households, retirees actually spend more per person on all major expenditure categories except clothing and transportation. It makes sense they spend less on clothes and cars because a significant part of this spending is work-related.

Of course, the biggest difference in spending between retirees and others is in health care, on which retired households spend more than twice as much per person than other households.

But wait: How can retirees spend more when they have less income? The answer is easy. Retirees don't save. In 2003, the average retiree saved only $624 annually, compared to $4,124 for all persons. But again, this makes sense because a large reason for saving is to build up a financial reserve for retirement.

So one big benefit of retirement is that money doesn't have to be budgeted for saving, either through Social Security, company pensions, 401Ks or other personal savings. Retirees can focus on living for now.

This isn't to say retirees are home-free, with no financial worries. In fact, retirees constantly face one big worry: the possibility of outliving their money supply. None of us knows exactly how long we will live; in fact, most want to live as long as possible. But since retirees aren't working, or at least aren't working full-time, this does leave the question of where the money will come from for expenses much later in life.

Of course, your Social Security is supposed to last as long as you live, although the current debate over its solvency does raise some questions. Certain kinds of company pensions, called defined benefit plans, will also pay out for the entirety of one's life.

For other retirement savings, there are two ways to ensure you don't outlive your money. One is to spend only the interest earnings from the retirement funds. Say you've saved $300,000 for retirement, and you earn an annual interest rate of 5 percent. This method means you'd only spend $15,000 from the fund each year, always preserving the original $300,000.

The second method is to use your retirement savings to purchase an immediate annuity. An immediate annuity will, in turn, pay you back an annual amount. The annuity's unique characteristic is that this annual amount will be paid as long as you live. You can also purchase an immediate annuity that will continue paying your spouse if you die first, although the annual amount will be less with this form.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html