 |
|
|
|
|
|
 |
|
|
Saving for Retirement
Most of us work very hard to accumulate an asset base sufficient to provide a comfortable, independent retirement for ourselves and our families. We look forward to the freedom of retirement and understand this freedom will require substantial financial resources. How well we live during retirement is largely determined by how well we plan and save today. We're living longer-meaning we have more retirement years for which to save and invest. Social Security is less certain than in the past. And corporate retirement plans are changing in ways that leave us more responsible for saving and investing for our own retirement. Retirement planning is an ongoing process that must begin well before retirement and continue though retirement.
Questions frequently asked
- "If I retire at 58 or 62, will I have enough assets to last into my nineties? "
- "Which pension distribution option will give me an ongoing 'paycheck' for the rest of my life?"
- "How can I ensure that I have the cash flow that I need?"
- "How can I organize to gain control of my wealth that I am taking with me into retirement?"
The Goals of Retirement Planning
Most of us achieve to acquire enough wealth to:
- Provide for unexpected or major expenses during their working years;
- Be financially independent during their retirement years;
- Continue to live in the same lifestyle, or better, in their retirement years than during their working years; and
- Be able to pass along a substantial portion of their wealth to their heirs.
There are additional factors to consider when planning for retirement. These considerations include:
- Early or later retirement;
- Medical problems;
- Work after retirement;
- Housing needs;
- Lifestyle changes; and
- Providing for spouse, heirs, or others.
Taking control of retirement assets begins with early planning. Because retirement assets that accumulate in employer-sponsored 401(k) plans, IRAs and annuities grow on a tax-deferred basis, all of the earnings -- growth dividends, capital gains and interest -- are added to the investment for future compounding. The earlier you begin saving, the larger the total amount can grow to. And funds that remain in a tax-advantaged account can continue to grow on a tax-deferred basis throughout retirement.
Since annual maximum limits are placed on contributions to individual retirement savings plans (for 2002, that's $40,000 in Keoghs, $11,000 in 401(k)s ($12,000 for those age 50 and above), and $3,000 in IRAs) individuals with the financial means to save more are looking for other tax-advantaged vehicles. Annuities are becoming more popular for just that reason. Because the assets in a variable annuity grow on a tax-deferred basis and there are no annual contribution limits, they can be an excellent choice as supplemental retirement savings vehicles.
Traditional Individual Retirement Account (IRA)
An IRA is by far the most common retirement plan option, but many self-employed business owners will find it inadequate for their retirement needs. An IRA should not be your exclusive retirement savings plan. Opening an IRA is exceedingly simple, and just about anyone can do it. However, you are severely limited in the amount of contributions you can make. Depending on your income level, you may not be able to deduct your contributions at all.
Maximum annual contribution
The lesser of 100 percent of compensation or $3,000 ($6,000 if you are married filing jointly). You may only deduct your contribution if you don't have another tax-favored retirement plan, or if you have another plan but your annual adjusted gross income falls below an IRS-specified threshold. The maximum individual contribution limits will rise to $4,000 in 2005 and $5,000 in 2008 (with corresponding married filing jointly increases). In addition, people over 50 can make extra "catch-up" contributions of $500 beginning in 2002 and $1,000 in 2006. You have until the due date of your income tax return (April 15), not including extensions, to set up and contribute to an IRA.
Roth IRA
Roth IRAs are similar to traditional IRAs, with one fundamental difference. While contributions to a traditional IRA are tax-deductible and the earnings are tax-deferred, a Roth IRA's contributions cannot be immediately deducted, but the earnings accrue free of federal income taxes. Because earnings accrue tax-free, Roth IRAs have the potential to provide you with more savings than traditional IRAs after you retire. Roth IRAs also have no mandatory distribution requirements, and have no age restrictions, so you can make contributions after age 70¸.
Maximum annual contribution
The lesser of 100 percent of compensation or $3,000 ($6,000 if you are married filing jointly). For individuals earning more than $95,000 annually, and joint-filing married couples earning more than $150,000 annually, maximum contributions are less, based on specific Adjusted Gross Income thresholds. The maximum individual contribution limits will rise to $4,000 in 2005 and $5,000 in 2008 (with corresponding married filing jointly increases). In addition, people over 50 can make extra "catch-up" contributions of $500 beginning in 2002 and $1,000 in 2006. You have until the due date of your income tax return (April 15), not including extensions, to set up and contribute to an IRA.
Annuities
Annuities are flexible insurance contracts designed to provide income and help you achieve long-term savings goals. And these are not unused financial vehicles: last year alone, $200 billion was placed in annuity contracts. Much like a CD is a contract between you and a bank, an annuity is a long-term contract between you and an insurance company.
Annuities have two stages: the accumulation phase and the payout phase. During the accumulation phase, you make purchase payments to the annuity, either in one lump sum or on an on-going basis. An annuity grows tax-deferred during the accumulation phase. It is similar to a traditional IRS or 401(k) where the gain is taxed when you choose to withdraw those gains from the annuity.
After making a single lump-sum premium payment, or a series of periodic payments, individuals can then receive regular annuity payments from the insurance company. These payments can be made over a definite period of time, or they can last a lifetime. Payments to the annuity owner can also be tailored to begin after the contract has been established for a number of years, or they can begin immediately after the first premium payment is made.
There are two types of annuities a fixed annuity where your values will grow based on an interest rate set by the insurance company and a variable annuity where your values will fluctuate depending on the value of the sub-accounts.
Fixed Annuity
- A fixed annuity is a tax-deferred investment that offers a competitive interest rate over a specified period of time.
- Fixed annuities are often used for additional retirement income and to diversify your portfolio.
- A fixed annuity can add stability in your portfolio, providing fixed income no matter what happens in the stock market.
- A fixed annuity has none of the risk and volatility of a stock-market investment and can be more stable than some other fixed-income instruments.
- Guaranteed regular fixed annuity payments help to ensure that you do not outlive your own retirement savings.
A fixed annuity can produce a steady stream of income through the following methods:
- Period Certain: You receive guaranteed payments for a fixed period of time, usually between five and 30 years. If you die during this period, payments will continue to a designated beneficiary.
- Life Only: You receive payments only for as long as you live. There are no payments to beneficiaries after your death.
- Life With Period Certain: You receive payments for as long as you live, but if you die within a predetermined number of years (the Period Certain), payments continue to your beneficiary for the rest of that time. If you die after the Period Certain, there are no payments to beneficiaries.
Variable Annuity
A variable annuity is a tax-deferred retirement savings vehicle that allows you to invest among a variety of stock, bond and money market funds managed by professional investment managers.
- The investment options available in a variable annuity are professionally managed to maximize your money's potential for growth. The return on a variable annuity is based on the investment results of the funds you select.
- The value of a variable annuity depends on underlying portfolios of stock, bond or money market funds.
- A variable annuity offers tax-free transfers among funds, which allows you to respond to changes in market conditions or your individual investment goals.
- When you begin taking income from your variable annuity, you can take it in a lump sum or on a systematic basis. You can choose from a variety of annuity payout options, including options that guarantee an income you can never outlive.
401(k) Plans and other Employer sponsored Retirement Plans
As a general recommendation it is advisable to participate in a corporate sponsored retirement plan. The main advantages are:
- You are not taxed currently on the portion of compensation that is placed in the plan.
- An employee has the option of choosing between cash or future benefits on a year-to-year basis.
- The contributions enjoy tax-free reinvestment of earnings and the opportunity to receive special tax treatment on certain plan distributions.
- The plans frequently features an "employer matching" provision in which the employer makes a contribution to the plan equal to (a certain percentage of) the employee's contribution.
That being said it is very important to mange your retirement plan assets prudently and develop a sensible assets allocation policy across all your retirement plan assets.
Retirement Expense Forecaster
Use the below form to project expenses during retirement. The closer you are to retirement, the more likely the accuracy of the forecast. Nevertheless, it is important even for younger people to periodically project what their estimated retirement expenses will be.
Annual retirement expenses will generally be funded by pension or other retirement plan benefits and social security. Any shortfall must be covered by tapping personal savings and investments.
Use this checklist to account for and project all sources available for funding your retirement. If you plan to work part time or will still receive income from an ongoing business, be sure to include those sources. Do not forget inheritances or insurance proceeds to which you may be entitled.
EXPENSES
Use this form to list your current expenses and to approximate and forecast retirement expenses. As a general guideline, most individuals will need about 75% of their current income to fund their retirement. But each case varies; some retirees will want to travel and/or shower children and grandchildren with gifts, whereas others may sell their homes and retire to a less expensive lifestyle. Bear in mind that the typical retiree, at age 65, can expect retirement to last 15-20 years.
|
|
|
|
