Wednesday, July 15, 2009

Planning for Retirement

Planning for retirement is a challenge for everyone. The earlier you begin, the longer you will have to accumulate funds and capitalize on compound interest. A plan designed to meet specific retirement goals may be separate from or part of the investment building block.

Some people have given a great deal of thought to retirement, but others have not. Less than half (42%) of working Americans have made a retirement savings calculation, according to the 2006 Retirement Confidence Survey, and 70% have begun to save for retirement. Unfortunately, this means that 30% of workers have not yet begun saving. Most experts believe that regular, systematic savings is a habit that is best established early and maintained, not only throughout the working years, but into the early stages of retirement since people are living much longer. Today, many people spend as many years in retirement as they spent in the workforce.

Financial experts have long described sources of retirement income as the three-legged stool: Social Security, company pension, and personal savings. Now with the growing concern over the future of Social Security, the reduction in benefits offered by employers, and the low personal savings rate, many see the three legs of the retirement income stool becoming shaky. Many say that the stool may need a fourth leg—paid work after retirement.

Now that the Social Security Administration has phased in automatic mailing of Personal Earnings and Benefit Estimate Statements to all wage earners, check yours for accuracy. It contains information that provides an excellent basis for retirement planning. Contact the Social Security Administration (Call 1-800-772-1213 or visit the Social Security Online Web Site to obtain a benefit request form.

Another source of retirement information is your employer’s personnel department which may have general tips on retirement as well as specific information about investments available in your pension plan. Many online sites provide information about retirement planning (See American Savings Education Council The following definitions should be useful in helping you to understand your retirement options.

12(b)1 Fee
A marketing fee levied on mutual fund shareholders to pay for advertising and distribution costs as well as broker compensation.

401(k) PlanAn employer sponsored, tax deferred, retirement plan. It uses pre-tax contributions from an employee’s regular compensation to invest for that employee in a number of possible financial instruments. Some companies will match investments. Plans vary widely between companies.

403(b) PlanA tax deferred retirement plan very much like the 401(k) Plan, but the main difference is that the employer is a non-profit organization.

Account Maintenance FeesFees charged by financial institutions and companies for maintaining accounts. For financial institutions, such as banks and credit unions, the fee may be based on the amount in the account or the number of transactions. For investment companies, such as stock brokerage firms and firms working with mutual funds, the fee is often charged for keeping an account going even though it’s too small for the fund to make a lot of money from it. A fee is also charged by both groups for custodial accounts such as Individual Retirement Accounts.

Annual Percentage Rate (APR)The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%. APR is a yearly interest rate that includes all fees and costs you pay to a lender (such as a credit card company or financial institution) when you borrow money. By law, lenders are required to tell you the APR.

Annual Percentage Yield (APY)
The yearly interest rate received from an investment. Also known as the effective yield. It takes into account how often the interest in paid (compounded). If two interest rates are the same, the one with the most compounding periods will have the highest APY (7% with daily compounding has a higher APY then 7% with quarterly compounding). It is important to always compare APY when comparing different interest rates before making an investment.