A Musician's Retirement Plan

As featured in: Performing Songwriter Issue #74, December 2003.  Visit performingsongwriter.com to order back issues or subscribe.

By Beverly Bartsch

Did your parents ever show you this chart? Mine did. I had great intentions that I would save $2,000 each year when I graduated from college. But somehow that education debt seemed larger than life, but life was costly as well, and the income wasn’t exactly what I hoped. In the years since, I have managed to contribute to various retirement plans, though I wasn’t the model student of the above early-investor method, much to my considerable regret.

In the Sept./Oct. issue we talked about getting out of debt. Now, here’s the followup piece--start saving for retirement. It’s not too late. It’s never too late. It’s just the earlier you start, the better off you are. As Henny Youngman said, “I have all the money I will ever need as long as I die by 4 p.m. today.”

If I tell you the truth, will you promise to keep reading? This stuff is boring! I can understand why we want to avoid it. As I started the research on options for retirement, I was suddenly searching eBay for dishes, and I already have all I need. But we could all use a fuller understanding of the retirement options, which will do more for one’s future than a few more plates. Let’s dig in.

The chart opposite is a simplified comparison of the options available to a self-employed individual. It really is a matter of looking at your current tax situation and deciding where is the best place for you to stash your retirement funds. A tax advisor can help you understand the tax consequences of your choice. The Internet is loaded with good information as well. The website www.invest1to1.com/invest1to1/planning was my source for compiling the chart on the opposite page. The site also has retirement planning calculators and other resourceful tools that walk you through how much money you will need to save for retirement. Go spend 30 minutes running some numbers; you may be surprised by the results and motivated to start saving even more.

Here are some traditional savings options:

PIGGY BANK: Now, you are not earning any interest on this money, but if you put $100 in per month, each year for 40 years, you still have $48,000, providing you don’t take any money out. It’s not going to grow, but you won’t lose it, either. By the way, do you know why the pig is the shape of the piggy bank? Apparently, a long time ago, people kept inexpensive pots or jugs in their kitchens that were made of a common clay known as pygg. When there was extra money, people put it into these containers. Over time, these containers were known as pygg banks, or pyggy banks. Eventually, someone had the bright idea to make the banks in the shape of a pig. (Growing Money, Karlitz, Honig, pg 2.)

SAVINGS ACCOUNT: Right now, the interest rates on savings accounts are at record lows. My money market savings account is showing an annual percentage yield earning of 0.35 percent. At that rate, it’s going to take an awful lot of time for it to compound to anything meaningful. But as long as your savings account isn’t incurring any monthly service or transaction fees, it’s a step up from the piggy bank. The interest you earn on the savings account is taxable, but you can use your money at any time, without any penalties. As long as your funds are in a federally insured institution, your account is insured up to $100,000. You can use this formula to figure out how long it will take to double your money: 72 divided by interest rate = number of years. ($10,000 @ three percent interest would double in 24 years).

CERTIFICATES OF DEPOSIT: Commonly known as CDs, these are described by the U.S. Securities and Exchange Commission as something for “investors searching for relatively low-risk investments that can easily be converted into cash. A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $100,000.” (Source: http://www.sec.gov/investor/pubs/certific htm)

The reason higher interest rates are offered when you purchase a CD is that you are giving up the ability to use your cash for the specified amount of time. CDs can be purchased in increments of months (three is usually the minimum) or years. The longer the period of time purchased for the CD, the higher the interest rate. Interest accrues (adds up) at regular intervals, usually at CD maturity, or annually with longer term CDs. When the CD matures, you are paid back the purchase price plus the interest earned. Be careful, CDs can also have automatic renewals.

One way to space out your CDs is to stagger the maturity dates. This way you could tie up the money you don’t need until later, get a higher interest rate, and still have it when you needed it. If for some reason you ended up not needing the money, you could always roll the CD over for another term and know it’s available to you in another three or six months.

MONEY FUNDS, MUTUAL FUNDS, STOCKS AND BONDS: OK, there are many great financial advisors, stockbrokers, analysts and companies out there that are more than willing to invest your money and earn a percentage or fee from doing so. You can also be a do-it-yourselfer with online stock trading. The greater the risk, the better the potential return, generally speaking. However, the greater the risk, the greater the potential to lose everything invested as well. I make no recommendations as to any particular stock or fund; it’s something you have to figure out for yourself and by talking to people you trust. I would like you to keep these points in mind while you’re having these discussions:
Have you saved your three-to-six month emergency cash in a savings account or CD? This should be equal to your total living expenses for that period. It’s emergency money. Don’t blow it.

If you’re buying stocks, find a company that personally interests you or something you care about. If a particular guitar manufacturer is a publicly traded stock and you won’t play anything else, maybe that would be a good stock for you to investigate.

Stock-market investing is not for the timid. Know how much you can afford to lose, because you might. I know people who have started with a small amount, say $500.When they earned $500, they cashed it out and kept investing with the profits. In this manner, they haven’t lost any capital.

Mutual funds differ from stock purchases in that the fund is a collection of various stocks; when you invest in a mutual fund, your money is pooled with others in order to purchase those stocks. The mutual fund manager is the one who decides what stocks belong in the fund. Funds can be grouped by industry area--for example, technology, medicine or environment-- which is another way to find a fund that fits your investment personality.
Bonds are basically IOUs from a town, business or government agency. A bond issue has the following components:
Face Value or Par: the amount of money that will be repaid to you if you hold the bond until it matures;
Maturity Date: the latest date by which the borrower must repay the loan;
Coupon Rate or Yield: the interest rate the borrower is paying based on the face value of the bond; Coupon Payments: how much will be paid at every interest period.

There are various types of bonds: corporate (issued by companies), municipal (issued by state and local governments) and treasuries (issued by the Federal government). Treasuries are made up of savings bonds, treasury bills, treasury notes or treasury bonds with the difference in each being the amount of the bond and term of maturity. Treasury bills and some U.S. savings bonds are bought at a discount, so instead of getting interest during the term of the bond, you just pay less up front and get all the interest at maturity.

By the way, municipal bonds are not subject to federal income taxes. For this reason, the interest rate is usually less than other bonds. Check with your bank if you want to purchase savings bonds; you can start with as little as $25.

Stocks, mutual funds and bonds are for the long haul. Don’t think you can, should or will make 25 percent returns on your investments for the first year and every year thereafter. The market fluctuates, and you can never hit all the highs and lows exactly-- neither can anybody else. If they did before, they were highly lucky, and it may happen again, but, it may not. Which brings me to my next point--dollar cost averaging. Let’s say that you want to invest $12,000 in the stock market or a mutual fund over the next year. You’re trying to decide if you should save all that money in a savings account and, on one magic day that you think the market price of said stock or fund is at a yearly low, you dump it all in. But how do you guess that you’re going to hit that low just right? You may, you may not. With dollar cost averaging, it just means that you invest $1,000 each month, on a certain day of the month--say on the 15th. You’re not trying to guess at market highs and lows. One month it may be a little down, the next a little up, but the beauty of dollar cost averaging is that you get a nice blend. And besides which, you’ve set yourself a systematic and regular savings program.

Be consistent--pay yourself. Whether you’re saving money in tax-deferred accounts, or typical stock market accounts, none of them will do you any good unless you actually invest in your own future. Start with $20 a month. Maybe you can drink half as much Starbucks and go to two fewer dinners in a month--how much would that be? Put that money aside. You may not have Social Security to depend on.

Speaking of Social Security (and Medicare), as a self-employed individual, you are required to pay the typical 7.65 percent, as any employee is. However, you are also required to pay the matching employer’s portion as well--another 7.65 percent. You are both employer and employee: You get both hits. As I scoured the Internet regarding Social Security benefits for those 40 years of age or younger, I found information that indicated Generation X could be out of luck when it comes time to collect their Social Security checks. However, the politics of the situation seem to indicate that it’s not in crisis until 2015 for Medicare and 2034 for Social Security; therefore, it’s politically wise not to talk about it. Go to the Social Security Administration website http://www.socialsecurity.gov/ and search “benefits” for a list of FAQs. It’s a comprehensive site that may answer any specific questions you have.

Bottom line for retirement savings: Better late than never. I’d rather be able to eat my meals in old age off my current dishes, than look hungrily at pretty, new, but empty plates. 

[My thanks to John C.Darwin of Smith Barney, Nashville, for his assistance with understanding retirement and investments.]

Beverly Bartsch has worked in the music business for 16 years in money-related matters. Her clients in the past have included Amy Grant, Michael W. Smith and Rachael Lampa.