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Saving for Retirement While Living Off Tips Takes a Great Deal of Discipline

By Pamela Yip, The Dallas Morning News
Knight Ridder/Tribune Business News 

Oct. 15--Living off tips can be tricky enough. But saving for retirement while living off tips takes a great deal of discipline and good sense. 

That's straight from a few of the pros who have managed to do it for years now. 

"You have good months and you have bad months, and you really have to plan for that rainy day," said Bobby Butler, 54 and a waiter at the Palm in Dallas. 

He's been waiting tables at the steakhouse for 17 years and in the industry for 30 years. 

January, February and March -- when conventions meet in Dallas -- are the most lucrative months for him. 

"Your income is quite a bit more in those months than it is in June, July and August," Mr. Butler said. 

Experts say tipped workers need planning and discipline to save money. 

So if you receive tips in your job, don't stiff yourself when it comes to putting away money for the future. 

The challenge for tipped workers is that they often have a wad of cash in their hands and their income can vary. 

"The temptation to spend the tips that you get is too large," said Travis Federick, a financial adviser at American Express Financial Advisors in Dallas, who was a waiter in his college days. 

"Most people who are working in the field are fairly young, and their knowledge of what to do in financial services is usually not very substantial." 

But it's that time advantage that young waiters, waitresses and other tipped employees need to parlay. 

"The message I always tell my students is: You've got to start early and just start putting that dollar away right now," said Agnes DeFranco, associate dean of the Conrad N. Hilton College of Hotel and Restaurant Management at the University of Houston. 

But she and other experts also acknowledge that tips comprise the bulk of their income for many waiters and waitresses. 

"It's all tips," said Mr. Butler. "That's the only income I have." 

Tipped employees should carve out a portion regularly for savings, financial advisers say. 

"I work five days a week and the best thing for me to do is to put away $20 a day in a big wine bottle," Mr. Butler said. 

He's fortunate because the Palm offers its employees a 401(k) retirement savings plan. And Mr. Butler participates. 

"There's probably 30 percent of our employees involved in it, which is a good percentage because a lot of them don't think 20 years down the road," said general manager Brian Perry. "I encourage them to be a part of it." 

At Al's Prime Steaks and Seafood, waitress Kelli Butcher feels passionately about saving. 

"It's so hard for people who wait tables to save because at the end of the night, we're paid in cash, and if you're not disciplined, you could be making excellent money and you won't have anything," said Ms. Butcher, 32, who's been a waitress since she was 17. 

But it's certainly possible for tipped employees to put a little aside. 

"I know that each night I set aside what I know I'm supposed to save every two weeks, and I do it," Ms. Butcher said. 

"I don't live beyond my means; I try not to have any credit cards, and any money I save goes toward something I consider an investment." 

She's got four individual retirement accounts, although she's not contributing as much as she'd like because she and her husband are saving for a house. 

"It's much easier to save when you have something to save for," Ms. Butcher said. "Each time I save large amounts of money I have a goal at the end of it." 

About $400 every two weeks is going toward a $10,000 down payment on their home. 

"It's amazing how much you don't miss the money when you get it out of your sight," Ms. Butcher said. 

If your employer offers a retirement plan, participate in it. 

"If they can take their hourly wage and drop that into the 401(k), it's a no-brainer," said Mr. Federick of American Express Financial Advisors. 

One way to make it easier to save for retirement is to regularly contribute a fixed percentage instead of a dollar amount, says Douglas Gill, a Certified Financial Planner and president of Gill Capital Management in Dallas. 

That's because if you have a lousy month in tips, you might be hard-pressed to come up with a fixed dollar amount, whereas a fixed percentage would be easier to handle. 

"They need to base their savings pattern on the seasonality of their tip income," Mr. Gill said. "You might during those fat seasons, when your tip income is good ... skim off a higher portion of that toward savings." 

The Vizor Group, a Dallas technology company, has developed software that enables restaurant employees to contribute a designated percentage or dollar amount of their tips to savings in mutual funds offered by the Dreyfus Corp. 

"It happens automatically at the end of their shift," said Richard Ellman, Vizor co-chief executive. "That's the whole concept -- small, consistent investments without their having to think about it or do anything." 

The software, called VizorVest, meets a need among restaurant employees, Mr. Ellman says. 

"A majority of the American population is invested in the equity markets," he said. "However, the percentage of people working in the restaurant industry that are participating in the market is less than half that of the general population." 

What's more, many restaurant workers are under 20 and aren't eligible for traditional benefit plans, Mr. Ellman says. Vizor's program allows workers 18 and older to participate. 

In addition, Vizor's software has a feature that protects employees if they have a slow shift. It stops any contribution unless the level of sale triggers a minimum $5 investment. 

"If you elect to contribute a certain percentage of your gross sales to your mutual fund each time you work, but on a particular day you don't make much money, then the Contribution Activation Protection System stops a contribution from being made," Mr. Ellman said. "This protects you from investing if you didn't make much money on a particular shift." 

One longtime Dallas waitress says she's considering prodding her younger colleagues to start saving for their retirement. 

"You can't afford not to," said Nadine Gifford, 62, who's worked for Denny's for 16 years and contributes regularly to the company's 401(k) program. "It's just something that people kind of shut their eyes to, but it's coming sooner or later. A lot of people don't realize it, but they really need to get with the plan." 

She likes the idea of having money automatically taken out of her paycheck for her 401(k) account. 

"I never see it and never miss it," Ms. Gifford said. "I'm going to need something to retire on, and I figured that was the best way to go." 

One crucial element that tipped employees must consider when saving is having enough money to pay income taxes. 

"If you have a person who is a good waiter and makes good tips, his hourly wage is probably not going to be enough money to cover the taxes on his wages and his tips," said Mary Kajs, an employment tax specialist at the Internal Revenue Service and North Texas tip coordinator. "If you're short every time, then you would need to make a quarterly payment just like a self-employed person." 

Tipped employees should increase the withholding on their W-4 form, also known as Employee's Withholding Allowance Certificate, says Rick Griffith, an IRS tax specialist. 

"The problem is, a lot of their withholding is on the wage part of it and not necessarily the tips part of it," he said. "They need to increase their W-4 withholdings because most end up owing every year." 

TIPS FOR SAVING 

Workers who are in occupations where they receive tips face a special challenge when it comes to saving because of the variability of their income. However, that doesn't mean they're not able to save for retirement. Here are some tips: 

-- Avoid the temptation to spend all your tips. 

-- Set aside a fixed amount regularly for savings. 

-- If your employer offers a 401(k) retirement savings plan, participate in it, especially if your employer matches your contribution. 

-- When contributing to a retirement account, set it up so that you regularly contribute a fixed percentage instead of a dollar amount. That way, if you have a lousy month in tips, you won't have to come up with a fixed dollar amount. A fixed percentage would be easier to handle. 

-- If you're like many workers who receive tips, you see your job as temporary before embarking on the career that you really want. Don't let that be an excuse for delaying retirement saving. The sooner you start the better, because your money has more time to accumulate. 

-- SOURCE: Dallas Morning News research 

-----To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com/ 

(c) 2001, The Dallas Morning News. Distributed by Knight Ridder/Tribune Business News. MEL, AXP, 


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