RETIREMENT PLANNING
Who doesn't dream of retiring while still young and healthy enough to travel and pursue favorite hobbies? But with many retirements now lasting 30 years or more, how are you going to support yourself for that long? To ensure a comfortable retirement, you should start planning now. To help you, we've included several articles on retirement planning:
If you have any questions or need help with your retirement
planning, please contact us at:1-800-553-6700 or CSIC@CapitalSecurities.com
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Planning
for Your Retirement Years
The key steps in planning for retirement include:
1. Determine how much income you'll need after retirement. Give serious thought to how you'll spend your retirement years. Do you want to travel a lot or are you content to stay at home pursuing inexpensive hobbies? Will you stay in your current home or move to a warmer climate? Do you want to retire totally or work part time? Depending on your plans, you may need anywhere from 70% to over 100% of your current income in retirement. If retirement is so far away that you're not sure what you want to do, you may want to use a range of retirement income assumptions, such as 70% at the low end, 90% in the middle range, and 110% at the high end.
2. Decide when you want to retire. Although many people would like to retire at an early age, the financial realities of supporting yourself for those additional years may make that difficult to achieve. You may have to work longer than you would like to save the amounts needed or consider part-time employment after retiring.
3. Estimate your current retirement benefits. Assess how much you're likely to receive from Social Security and company pension plans. Over the years, these benefits have been providing a smaller percentage of retirement income and are likely to continue to decrease in the future. Therefore, use conservative estimates.
4. Add up your current retirement savings. Preparing a net worth statement will help you determine how much you currently have saved for retirement. Also consider other financial needs that must be met, such as paying for a child's college education or providing nursing home care for an elderly parent. These needs can significantly impact how much you'll have available for retirement.
5. Develop a retirement savings plan. Based on the above factors and considering inflation, you should be able to make a reasonable estimate of your total capital needs at retirement. You can then calculate how much you need to save on a monthly, quarterly, or annual basis.
Take time to assess how you will save these sums. Use tax-deferred investment vehicles that are available to you. Invest in your company's 401(k), 403(b), or other defined-contribution plan as soon as you become eligible. You may also want to consider a traditional or Roth individual retirement account (IRA). Carefully analyze how you will invest your retirement assets, using alternatives that are appropriate for the long-term nature of your savings.
Don't give up if you can't afford to save the amount needed to meet your goals. You can start out saving what you can and increase your savings in subsequent years. You can also revise your retirement plans. Reducing your financial needs, delaying your retirement date, or working part time after retirement can substantially change the amount you'll ultimately need for retirement.
6. Review your retirement plan annually. This allows you to assess your program and make any needed changes.
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Accelerating
Your Retirement Savings
If you've reached your 40s or early 50s and find you haven't saved much for retirement, don't just abandon your retirement goals. You can still save significant sums by approaching the task seriously. Some strategies to consider to accelerate your retirement savings include:
 | Calculate precisely how much you'll need for
retirement and how much you currently have saved. Although it's
tempting to avoid this task, finding out how much you'll be short can be a
very big motivator in changing your behavior.| Use your peak earning years to substantially
increase your savings. Typically, your last few years of
employment are your peak earning years. Instead of increasing your lifestyle
as your pay increases, save all future pay raises. Consider downgrading your
lifestyle, putting any cost reductions into savings. | Have a nonworking spouse re-enter the work force.
Your children may now be out of the house or at least won't
require as much supervision. It may make sense for a nonworking spouse to
re-enter the work force, saving all earnings for retirement. Or you might
want to take on a second job or start a business. | Contribute the maximum to tax-advantaged
retirement plans. If your employer matches contributions to a
401(k) plan, contribute enough to take advantage of all matching amounts.
This automatically increases your savings by the amount your company
matches. Also look into traditional and Roth individual retirement accounts. | Sell your house and buy a smaller one. At
a minimum, the move should reduce your living expenses, allowing you to put
the difference in savings. If you have significant equity in your original
home, you may have proceeds left over that you can put into savings. If you
have owned and lived in your home in at least two of the last five years,
single taxpayers can exclude $250,000 of capital gain on the sale of a
principal residence and married taxpayers filing jointly can exclude
$500,000. | Select your retirement date carefully.
If you can't save the amounts needed by your desired retirement date,
consider postponing retirement. Working a few extra years gives you more
time to accumulate your savings and delays when you start withdrawing from
those savings. Or consider working after retirement at least part time. Even
a modest amount of income after retirement can substantially reduce the
amount needed for retirement. | Stay focused on your goals. At this
age, it's imperative that you maintain your commitment to save for
retirement. | |
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An
Evolving Definition of Retirement
The traditional definition of retirement involves an individual, usually around age 65, going from full-time employment to no employment. Due to generous pension benefits and Social Security benefits indexed for inflation, past generations were able to retire to a comfortable lifestyle without much in the way of savings.
However, the baby boomer generation faces two significant trends that are
likely to change this definition of retirement:
| Increased longevity. Not only are we
now living much longer than in the past, but it is expected that this trend
will continue at an even faster pace in the future.| Reduced third-party support. While the
Social Security system is expected to survive, no one knows what the
benefits will be when the baby boomer generation retires. Changes to the
system are expected, with reductions to current benefits a likely result.
For years, the trend in company-sponsored pension plans has been a
significant increase in defined-contribution plans, where employers and
employees make specific contributions to the plan, at the expense of
defined-benefit plans, where the employer promises a specific benefit to
retirees. | |
The baby boomer generation thus faces a longer retirement at a time when they must shoulder much of the responsibility for funding that retirement. Faced with that daunting task, the question remains whether this generation will brace the traditional definition of retirement or will redefine retirement to accommodate these trends.
One likely change would be to postpone retirement to a later age. In fact, the baby boomer generation has tackled most of life's major milestones at a later age than past generations - they entered the work force, got married, had children, and bought homes at much later ages than past generations.
There is already some evidence that a significant portion of this generation expects to work at least part-time after retirement. A 1999 study by the American Association of Retired Persons found that only 16% of the respondents did not expect to work at all after retirement, while 4% weren't sure whether they would work. The remaining 80% plan to stay employed, with approximately one-third saying they would work for financial reasons and two-thirds saying they would work because they like work. About 75% said they would work part time, while the remaining 25% said they would either start a business or work full time at a new career.
Another study, the 1999 Retirement Confidence Survey conducted by the Employer Benefits Research Institute, found similar results, with 68% of the respondents indicating they expect to work in retirement.
Incentives are already being factored into retirement benefits to encourage later retirement ages. The Social Security system is increasing the normal retirement age from 65 to 67, with individuals born after 1938 affected by this change. Benefits for those retiring at age 62 will be reduced from 80% of full benefits to 70%, while the increase in benefits for deferring retirement past normal retirement age will gradually increase. Defined-benefit plans encourage workers to leave at a certain age, since benefits do not typically increase much once retirement age is reached. Defined-contribution plans, on the other hand, continue to accrue additional funds as you continue to work.
While the cost of funding a long retirement looks daunting, evolving trends in retirement may help. If we retire later and work at least part time during retirement, the savings needed can be significantly lower.
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Don't
Touch Your Retirement Funds
Defined-contribution plans, such as 401(k) plans, place much of the responsibility for retirement saving in your hands. You decide how much to contribute and how to invest those funds among the plan's alternatives. There are even circumstances where you can take control of the funds before retirement.
Once of those times occurs when you change employers. Depending on the size of your 401(k) plan's balance, you may be able to leave the funds in your former employer's plan, transfer the funds to your new employer's plan or an individual retirement account (IRA), or withdraw the funds. If you withdraw the funds, you must pay income taxes and a 10% federal penalty when withdrawn before age 59 1/2 (or age 55 if you are retiring). But paying taxes and the penalty is only the short-term impact. In the long term, you lose any additional tax-deferred growth and those funds won't be available at retirement. Even if that balance is currently small, over the long term it can make a significant difference in your retirement savings.
For example, assume you are 25 years old, have a 401(k) balance of $10,000, and are in the 28% tax bracket. If you withdraw the funds, you pay 28% in federal income taxes ($2,800) and a 10% federal penalty ($1,000), leaving a balance of $6,200. But if you transfer the funds to a rollover IRA earning 8% annually, you'll have a balance of $217,245 at age 65, before paying any taxes. Even after paying taxes of 28%, your balance will equal $156,417. (This example is provided for illustrative purposes only and is not intended to project a specific investment's performance.)
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An
Annual Review of Your 401(k) Plan
At least annually, you should thoroughly review your 401(k) plan. Some items to consider include:
| Have your goals or objectives changed? Most
people use their 401(k) plan to fund retirement, although it can also be
used for other things, such as to help pay for a child's college education
or for a down payment on a house. Take time to reassess your goals and
objectives. If you are using your 401(k) plan to save for retirement,
calculate how much you'll need at retirement as well as how much you should
save annually to meet that goal.| Are you contributing as much as you can to the
plan? Review how much you are contributing to see if you can
increase your contribution rate. One strategy is to allocate any salary
increases to your 401(k) plan immediately, before you get used to the money
and find ways to spend it. At a minimum, make sure you are contributing
enough to take full advantage of any matching contributions made by your
employer. | Are the assets in your 401(k) plan properly
allocated? Some of the more common mistakes made when investing
401(k) assets include allocating too much to conservative investments, not
diversifying among several investment vehicles, and investing too much in
the employer's stock. Saving for retirement typically encompasses a long
time frame, so make investment choices that reflect that time period. For
many, that means that a significant portion of their assets should be
invested in growth vehicles. Use this review to ensure that your allocation
still makes sense. Also review the performance of your investments compared
to appropriate benchmarks. | |
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Countdown
to Retirement
When your retirement date is only a couple of years away, take steps to ensure that all financial arrangements are in place. Some items to consider include:
| How much will you spend annually during
retirement? You probably looked at these numbers when planning
for retirement, but take one final look based on your current retirement
plans. Don't wait until after you retire, when your options are more
limited. Based on this analysis, you may decide to postpone retirement or
actively look for ways to reduce your expenses.| What is the value of your total retirement
investment portfolio? You may be saving through a variety of
retirement vehicles, such as 401(k) plans, individual retirement accounts
(IRAs), annuities, and personal investments. Analyze your entire portfolio,
estimating how much income can be expected after retirement. When you
retire, you may need to make changes to your portfolio, including
reallocating some investments, deciding how to invest a lump-sum
distribution, or making arrangements for monthly income distributions. | Have you checked with your employer regarding
pension plan benefits? Pension benefit choices are usually
irrevocable, so evaluate your options carefully, especially when choosing
between an annuity and a lump-sum distribution. Ask your employer to
calculate your benefits based on different retirement dates. You may find
that delaying retirement by a few months will increase your benefits. | Do you know how much to expect in Social Security
benefits? The Social Security Administration now sends Social
Security Statements to all workers aged 25 and older approximately three
months before their birthdays. The statement estimates your Social Security
benefits at age 62, full retirement age, and age 70. Review these estimates
as well as other pertinent factors to decide when to start benefits. Apply
for benefits at least three months before you want to receive them. | Will you work after retirement?
Working can help significantly in funding a long retirement. However, be
aware that earnings that exceed certain limits can reduce your Social
Security benefits if you are under age 70. In addition, once certain income
levels are exceeded, a portion of your Social Security benefits is subject
to federal income taxes. | How will you provide for health insurance? Find
out what health insurance benefits your employer provides after retirement,
if any, and how much you must pay for those benefits. If you retire before
age 65, you may have to purchase health insurance yourself until you qualify
for Medicare. Even with Medicare, you'll probably want to investigate
medigap insurance so you aren't left unprotected in key areas. | Have you reviewed other financial areas,
including other types of insurance and your estate plan? Make
sure you have sufficient life insurance and look into long-term-care
insurance. Review your estate plan to make sure it still reflects your
wishes for the disposition of your estate. Retirement is a major change in
your life. It is usually a good idea, before then, to review all financial
areas and make any necessary changes. | |
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Copyright © 2000. These articles intend to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
FR2000-0106-0095