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Education Center – Retirement

Getting Ready to Retire
Creating a Game Plan
Setting Goals
Identifying Resources
Being Realistic
Considering Inflation
Considering Funding
Retirement FAQs


Getting Ready to Retire

Congratulations – you made it here! The first step toward financial security in retirement is taking the time to learn about your current financial situation and saving options. Americans live longer and retire earlier nowadays. Retirement can feasibly last 20 years – a significant period of time in your life, which will require a significant bankroll. Now is the time to prepare financially. Whatever your age, finances or saving experience, this is the right place for you to be to get started.

Saving for retirement can feel about as immediately gratifying as paying taxes. But, think of it as saving up to buy your way out of the workforce. (A definite incentive!) Imagine quitting your job today. How much would you need in your savings accounts, IRAs, 401(k) and other retirement plans to support your current lifestyle for the next 20 years? (Not to mention to offset the added costs of inflation and rising medical expenses.) Shocking thought, isn’t it?

What, then, will fund your retirement when you choose to retire? Many retirees depend largely on Social Security checks and guaranteed employer pension plans. However, the reality is that future retirees will need to depend more on their own personal savings, IRAs, and employee-funded retirement plans than on government and employer-guaranteed income to fund their retirement. NOW is the time to start saving for retirement. Whether you are age 22 or 52, you can take easy, (relatively) painless steps to help lead you to a more financially secure retirement.

How much will I need to save for retirement?
How much will I receive in Social Security?
I’m retired, how long will my savings last?
How much can I save with my 401(k)?
Compare Roth 401(k) and Traditional 401(k) retirement savings plans.
How much will inflation affect my retirement?


Creating a Game Plan

Do you worry about the penalty assessed for a late credit card payment? Think of the late payment penalty you cost yourself every time you delay putting money into your retirement savings. Follow these steps to get started on your retirement savings game plan.

1. Use an online planning tool or seek professional advice to determine your ultimate financial goals for retirement, and the amount you will need to save each month to attain your goals.

2. Include retirement savings in your monthly budget and pay yourself first.

3. Open an IRA and contribute a set dollar amount every month.

4. Make sure you are contributing at least the amount needed to maximize the employer match feature, if your (k) plan has one – it’s like free money.

5. Can’t do it all at once? Set up a savings plan where you start out saving at a rate you can live with, say six percent of your income, and, over the course of a number of years, work up to the amount you need to be saving to reach your retirement goals If you have to work up to the amount you need to be saving – vow to raise your employer plan contribution percentage one percent every six months Chances are, you won’t even notice the reduction in your paycheck at this level of increase.

6. Remember to diversify your investments – not only between the investments offered in your employer-sponsored retirement plan or IRA, but also between where you invest your savings – be it an IRA, (k) plan, purchasing a home, or all three.

7. Revisit your savings plan every year Your financial situation, your view of retirement, your health, and your family status – can all change within a year’s time.


Setting Goals

If you have been saving a little for retirement now and then – good for you! You’re ahead of the game. But, have you actually projected how much you’ll have banked by the time you reach retirement? Statistics show that only a third of individuals surveyed have actually taken the time to calculate how much they will have saved by the time they retire, never mind calculating how much they will truly need. It’s great if you’re already setting something aside, but saving at your current rate might not be enough to reach your financial goals.

When setting financial goals, you should consider short-term goals, such as a new couch; midterm goals, such as debt reduction; and long-term goals, such as paying off your mortgage and saving for retirement. While reaching short-term and midterm goals will impact your life immediately, or in the near future, it’s important to keep long-term goals like retirement saving in sight. Retirement may seem far off, but you’ll likely regret short changing yourself in retirement more than having $20 less in your pocket today.

Brainstorm regularly to generate ideas for goals. Write down your goals so you can physically arrange them by importance. Prioritize your goals by what is most important to you. Hopefully, financial stability in retirement will be of one of the most important goals in your life. When you sit down to make out a savings plan, think about what is most important, regardless of whether you will see the results in two months or 10 years.


Identifying Resources

How will you fund your retirement? There are many different ways to finance your retirement, including Social Security, IRAs, employer-sponsored retirement plans, personal savings and assets such as your home.

The first step in figuring out what you need for retirement is to calculate your net worth. In other words, if you sold everything you owned and paid off all your debts – how much cash would you have left in your pocket?

Your basic financial goal for retirement should be to increase your net worth. You can do this by paying down debt, increasing savings and purchasing a lifetime investment such as a home. Assets that provide cash income, such as an IRA or employer-sponsored retirement plan, and assets that don’t provide income, such as your home, make up the balance of your net worth.

The safest bet is to make sure your net worth consists of a variety of investments that provide both income-producing assets and noncash assets.


Being Realistic

Picture yourself in retirement. In order to make those dreams come true in the future, you must be realistic about your finances today. The amount of money you’ll need for retirement will depend on many factors, such as the following.
How many years will you have in retirement?

What kind of lifestyle do you want to live?

Will you be single or living with a partner?

Will you own your home debt-free, or will you rent?

Will you still be paying off college expenses for kids?

Will you be contending with new medical expenses or health issues?

Although some of these factors are impossible to predict, an easy rule of thumb is that you will need at least 70 percent of your pre-retirement income to continue your pre-retirement lifestyle in retirement, and more if you’re planning to kick it up a notch in retirement. Use an online planning tool, or work with a professional financial planner, to calculate exactly what you will need to save today in order to live the kind of lifestyle you choose in retirement.


Considering Inflation

The cost of retirement will likely go up every year due to inflation. This means that the money you save now won’t buy as much when you retire. For example, say you buy a set of golf clubs today for $300. In 2026, assuming a four percent rate of inflation, that same set of golf clubs would cost you $739. (Just imagine what green fees will be by then!)

Adjusting for the effect of inflation is essential, but tricky, because inflation rates vary from year to year. In 1980, the rate of inflation was a whopping 13.5 percent. In 1998, it was only 1.6 percent. The current inflation rate is 3.0 percent, but it varies over time (Department of Labor, “Savings Fitness”). Thus, it is difficult to figure out exactly what the inflation rate will do to the value of your retirement dollar. It is always safer to figure a higher rate of inflation when calculating how much you need to save for retirement and have your money buy more than previously thought. (That way, you can go for the titanium Callaway clubs!)


Considering Funding

Traditional IRA
A Traditional IRA is a common and very beneficial retirement savings option. Current contribution limits allow anyone under age 70½ with earned income to contribute 100 percent of earnings up to $5,000 for years 2008, and up to $6,000 for those age 50 and over. If you were to contribute the entire $5,000 (or $6,000, if applicable) you may be able to deduct the amount on your tax return, depending on your marital status, your income and whether you or your spouse participate in an employer-sponsored retirement plan. The ability to deduct an IRA contribution on your tax return means you don’t pay taxes on the money you put in your IRA until you take it out (ideally at retirement). Chances are, that when you’re in retirement, you’ll also be in a lower tax bracket, making your tax deferred IRA savings even more valuable! Plus, you do not pay any taxes on any interest your contributions earn until you choose to take money out of your IRA.

If you are eligible for an IRA contribution for a particular tax year the latest date to make the contribution is generally April 15 of the following year. When April 15 occurs on a weekend or legal holiday the next business day becomes the deadline.

Roth IRA
Maybe you’d prefer a Roth IRA. A Roth IRA has the same contribution limits as a Traditional IRA, but you don’t have to be under age 70½ to contribute to it. However, you can be restricted from contributing to a Roth IRA at all if you are single and make over $116,000 in a year, or are married, filing jointly, with joint income over $169,000 per year. Roth IRA contributions are not tax deductible. The appeal of a Roth IRA, though, is that, not only are the earnings on your contributions tax-deferred, they may also be tax-free if you wait to take them out until you’ve had a Roth IRA open for at least five years, and you reach age 59½, become disabled, die or qualify as a first-time homebuyer.
The latest date for a Roth IRA contribution is identical to the deadline for Traditional IRA contributions.

Self-Employed Individuals
If you are self-employed, you can take advantage of an extra opportunity to save for retirement by opening and contributing to an employer-sponsored plan for yourself and any employees. Simplified employee pension (SEP) plans, savings incentive match plan for employees (SIMPLE), and Individual(k) plans (a type of 401(k) plan) are three employer-sponsored retirement plans that are easy for small employers to set up and maintain. In addition to the benefits of saving for retirement on a tax-deferred basis, some small employers who establish new retirement plans (effective beginning January 1, 2002) are eligible for a business tax credit of up to 50 percent of the plan start-up costs for a period of up to three years. A $500 maximum credit limit applies for each of the three years. Seek financial advice to determine which plan might be right for your business, and whether you should file for the start-up plan tax credit. The IRS Publication 560, Retirement Plans for Small Business, is a good source of basic information.

401(k)s and Other Salary Deferral Plans
The 401(k) plan is a popular type of retirement plan offered by many employers. 401(k) plans are salary deferral arrangements where employees choose to set aside (defer) a certain portion of their paychecks into retirement plan accounts. If you participate in a 401(k) plan, the amount of money available to you in retirement from the plan will depend on how long you participate in the plan, how much is invested by you and your employer, and how well your investments do over the years. Other types of employer-sponsored salary deferral plans are 403(b) plans, 457 plans, SIMPLE plans and salary reduction SEP (SAR-SEP) plans. All of these plans have separate and distinct rules and must be looked at individually, but the salary deferral feature is common to all. Although salary deferral plans are primarily funded by employee salary deferrals, many employers contribute to each employee’s account by giving either a profit sharing contribution or by matching a certain percentage of the employee’s deferrals.

Many people mistakenly believe they cannot afford to reduce their paychecks by the amount they would like to contribute to their 401(k) plans. But the following example illustrates that the reduction in take-home pay is not as big as some might think. Assume you defer $100 into a 401(k) plan each month, and you pay income taxes at a rate of 15 percent. The $100 you put in your 401(k) plan is not included in your taxable income until you take it out of the plan. If you don’t put that $100 in your 401(k) plan – you will pay $15 tax on that $100 and take home only $85. Thus, your $100 retirement plan contribution actually only reduces your take-home pay by $85. This is like buying your retirement at a discount.

Once you have decided where to save your money, there are many factors to consider in deciding how to invest your savings, such as your age, income, retirement goals and risk tolerance. Every investment you make carries a certain amount of risk and potential reward. Whatever your financial status and risk tolerance, diversifying your investments is always the safest strategy.

Diversifying your investments means spreading your contributions among the different types of investments offered by your IRA or 401(k) plan. The theory is that asset allocation/diversification may reduce risk because it combines several different asset classes, each with different risk and return characteristics.

You can diversify between investment categories, such as stocks, bonds, money market funds and bank products. And, you can diversify between investment classes within each category. For example, most 401(k) plans offer mutual funds as a way for participants to invest in stocks. A mutual stock fund is a fund that invests in many different types of stocks. This way, a professional stock manager is picking a large group of stocks to invest the fund in – you are not responsible for monitoring Wall Street on a daily basis to pick individual stocks.

Mutual funds usually buy shares within one type of company, such as large, well-established companies, small, newly formed businesses, or international companies. You can choose which type of mutual fund to invest in based on your risk tolerance and earnings expectations. Diversifying between investment categories and investment classes may be one way to help you reduce risk and tailor your investment strategy to meet your retirement goals. (Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.)


Retirement FAQs


  • Are there potential drawbacks to simply naming my estate as the beneficiary of my IRA?
  • Are there potential drawbacks to simply naming my estate as the beneficiary of my IRA?
  • What is the difference between a Traditional and a Roth IRA?
  • What requirements must I meet to be eligible to make a contribution to a Traditional IRA?
  • Does investment income qualify as earned income for purposes of making regular contributions to a Traditional or Roth IRA?
  • How does being an active participant in an employer-sponsored retirement plan potentially affect my ability to make a tax-deductible contribution to a Traditional IRA?
  • If I’m self-employed, can I contribute to a Tradional IRA if I’m already contributing to a business retirement plan like a simplified employee pension (SEP) plan?
  • If I have a certificate of deposit that is earning a good rate of return and does not mature for several years, may I contribute the CD to my IRA in lieu of cash for my IRA contribution?
  • What is a spousal IRA contribution?
  • What is the contribution tax and how does it work?
  • Can I transfer or rollover assets from my Traditional IRA to a Roth IRA?

Employer Sponsored Retirement Plans

  • What are some of the most common types of employer-sponsored retirement plans? (Answer will have bulleted list and each bullet will be clickable to define.)
  • What criteria must an employee meet to participate in an employer-sponsored retirement plan?
  • Can my employer require that I work for the company for a specified period of time before I can become eligible to participate in my employer’s retirement plan?
  • What is vesting?
  • What is a salary deferral option?
  • When do participants under an employer-sponsored retirement plan generally become eligible to begin taking contributions from the plan?
  • Are distributions from an employer-sponsored retirement plan generally subject to taxation?

Social Security

  • How is my retirement planning strategy affected by Social Security?
  • How is my Social Security retirement benefit determined?
  • How can I project how much I will get from Social Security?
  • What is the earliest age at which I can choose to begin receiving Social Security retirement benefits?
  • How will my Social Security retirement benefits be affected if I choose to begin receiving benefits prior to my full retirement age?
  • When should I apply for Social Security Retirement benefits?
  • Where should I apply for Social Security Retirement benefits?
  • Can I apply online?

Medicare & Medicaid

  • What is Medicare?
  • What is Medicaid?
  • At what age am I eligible for Medicare?
  • Are there eligibility requirements to qualify for Medicare?
  • What does Medicare pay for?
  • What doesn’t Medicare pay for?
  • How do I apply for Medicare benefits?
  • What is Medigap?

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