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 www.socialsecurity.gov) 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 www.asec.org). The following definitions should be useful in helping you to understand your retirement options.

DEFINITIONS:
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.

Start Early for a Comfortable Retirement

Many people don't start thinking about their retirement planning until they are well into their career – then they realize how much valuable time they lost. If you start saving for retirement now, you have the best shot at attaining long-term control over your finances and ending up your life in comfort.

A common way people take advantage of time and compound interest is through an Individual Retirement Account. If you open an IRA in 2007 you can invest $4,000, which is the maximum annual contribution. That $4,000 will be invested in mutual funds, stocks or bonds that will provide a return within the IRA account. By the end of the first year you'll have the original $4,000 investment, plus any income it has earned. Now you've got $4,000 earning interest plus interest earning interest. And on top of that, you can make a contribution in 2008. The entire sum will earn interest and so on.

If you start making annual $4,000 contributions to a Roth IRA at age 37, you'll have contributed $112,000 by the time you retire at age 65. At a 7 percent rate of return, you should have $345,386 in your account at retirement age.

Keys to Retirement Success

• Start early: the younger you are when you begin contributing to your IRA, the longer your money will have to compound, making it worth even more when you retire.
• Contribute every year: Even if you're tempted, don't skip your IRA contribution. Give your money the best possible chance to grow by socking away a little bit every year.
• Resist the temptation to withdraw the money early: You'll have to pay a penalty of about 10 percent and your retirement nest egg will be that much smaller.
• Aim for a high rate of return: The more your money earns annually, the more you'll have at retirement.
• Leave the money in longer: Money gets the greatest effect from compounding in the later years, so the longer you can leave it in your account, the more you'll have when you withdraw it.

10 Barriers to Success (from John Bishop of Teaching Moments)

1. No clear vision – the clearer your vision is of your goal, the faster you will achieve it.
2. Fear of failure – don’t let worry, fear and uncertainty hold you back from reaching your goal. Eliminate bummer words like never, can’t, maybe or if.
3. Lack of determination – turn challenges into opportunities. Come at them from the other side.
4. No action plan – write a detailed, step-by-step plan including a timetable and written strategy that you review every day or week.
5. Change –make adjustments as needed but don’t lose focus on the goal.
6. Negative thinking – everyone has some self-doubt. Ask yourself everyday: 1. Did I give my best effort and 2. Did I move closer to my goals?
7. Lack of enthusiasm – you are your own best cheerleader. Look at all days as good days, some are just better than others. You’ll find your enthusiasm is contagious.
8. Procrastination – You can have a great written plan, but you must take action. Be self-motivated, determine what motivates you and take action.
9. Making excuses – take responsibility for your success.
10. Learn from your mistakes – Everyone makes them. Successful people turn mistakes into learning opportunities.

Roadblocks can actually be stepping stones to success. Identify what holds you back and turn it into an opportunity!

Will You Outlive Your Retirement Assets?

Hopefully not, but the odds don't look good. Even if you are a long way off from retiring, you should keep reading. This might affect you sooner than you think, especially if your parents run out of money during their retirement. Also, if you don’t plan for retirement in your youth, you run the risk that you won’t have enough time to accumulate the assets you will need when you do eventually retire (Yes, I’m speaking to all of you 20 and 30 year olds).

While reading through the Wyoming Tribune Eagle today I came across an article entitled "Put more money into retirement savings." This article referenced a study by Ernst & Young that was commissioned by Americans for Secure Retirement. After reading the article I decided to go to the source and find out who Americans for Secure Retirement are and get more information on what retirees can expect financially post retirement. Right up front I want to say that I didn’t do an extensive amount of research into Americans for Secure Retirement or their coalition members. I was primarily looking to see if AARP has any involvement with them since I know that AARP is working diligently on this same issue. In looking through the list of coalition members, I found the names of some organizations that sounded familiar, but none that I am personally acquainted with. I’m giving you this information so that you can do your own due diligence before deciding whether to support the proposals of this group or not. It appears that they have quite a few members who are in the business of selling annuities and the coalition’s solution appears to be linked to more people buying annuities. This doesn’t mean they aren’t legitimate or it isn’t a good solution, it just means you should be double sure to do your homework.

Anyway, back to the quest6ion at hand. Will you outlive your retirement assets? Unfortunately, the answer is probably. According to the press release put out by Americans for Secure Retirement, “almost three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living.” When I checked the results for Wyoming the news got even grimmer. According to the study approximately 8 out of 10 people nearing retirement (58 to 65 years old) and 7 out of 10 people at retirement (65 years old or older) in Wyoming will outlive their retirement assets.

Pretty scary news but there are things you can do whether you are at or near retirement age or even if retirement is a long way off. The following suggestions apply whether you are twenty or twenty three times over.

• Trim your budget. If you are a long way off from retirement this will enable you to put more into your retirement account and fund that rainy day/emergency account that you have been meaning to start. If you are close to or at retirement, trimming your expenses back will help to preserve your assets.


• Review your financial goals. Whether your financial goals are for tomorrow or 30 years from now, reviewing your retirement savings and strategies on a regular basis is an important step to ensure that your money is working for you. As you get nearer to retirement your needs and tolerance for risk change. I’m not suggesting that you chase the market or make drastic changes on a regular basis but I am suggesting that as you get older you make prudent changes in your portfolio to reflect the fact that you are getting closer to relying on your retirement nest egg as a source of income and probably won’t be as comfortable riding the ups and downs of volatile markets as someone who has 30 years until they need the money.


• Rethink how much money you will need in retirement. The old rule of thumb of retiring on 70% of pre-retirement income doesn’t seem to be holding true anymore. According to a financial consulting firm at an AARP conference I attended, people need to plan on having 100% of their pre-retirement income available to them at retirement in order to maintain the same standard of living post retirement as they did when they were still drawing a paycheck.


• Plan on retiring later. By continuing to work you reduce your dependence upon your retirement savings and leave more money for those days when you can no longer draw a paycheck.

If you fear that you are going to outlive your assets and don’t know where to turn, give me a call or drop me an email and I will do my best to get you in touch with people that can help.

Julie

Pay Less Taxes and Get Free Money Too

I know, it sounds too good to be true, but in this case it is the real deal. With a little bit of work and sacrifice on your part you can reduce your taxes and increase your savings with money from Uncle Sam and your employer. Contributing to a tax deferred retirement plan earns you money in three ways.

1. Your contributions reduce your tax liability by reducing your taxable income. For every dollar that you contribute to a tax deferred retirement plan your taxable income is reduced by a dollar. As an example, if you are in the 27% tax bracket you will reduce your taxes by 27 cents for every dollar you contribute. It might not seem like much, but it adds up. If you were to contribute $1000 you would save $270 in taxes.

2. Many employers offer to match an employee’s contribution into a tax deferred retirement plan up to a certain amount. If this is the case with your employer, you are guaranteed a 100% return on your money. For example, if you earn $30,000 a year and your employer is willing to match your contributions up to 4% of your annual salary, you will earn an additional $1200 for your retirement account by contributing $1200.

3. Once invested into a retirement account your money doesn’t just sit there. By utilizing wise investment strategies your money will grow over the years. Once again, an example really illustrates the benefit of contributing to your retirement plan. If you were to invest $1200 per month for 10 years and earn a 5% rate of return you would have $15,528 in your account at the end of the 10 years. This is $3528 more than the $12,000 that you contributed over the 10 year period of time.

Unfortunately many people don’t take advantage of the benefits of a tax deferred retirement plan. Don't wait until tax time to start think about this important topic, talk to your employer today about contributing to an employer sponsored retirement plan and don't forget your IRA options. For more information on Individual Retirement Accounts (IRAs) check out this website http://ohioline.osu.edu/mm-fact/0003.html.