Retirement Planning
..an integral part of Wealth Management
Retirement planning is an integral part of your overall financial plan. Strategies should be designed to suit your goals and comfort level as well as to take advantage of tax saving opportunities. For any plan to be effective, it is necessary to implement these strategies and to review your goals and progress periodically. Working with Money Concepts as your personal Wealth Coach is critical.
The amount you will need in retirement depends on the age you plan to retire, your desired retirement lifestyle, how long you expect to live and the rate of return you expect to earn on your investments. Social Security and employer-sponsored pension plans will probably provide a smaller percentage of what you will need than they did for your parents. The most important aspect of projecting your future needs is estimating how much you will have to save each year to produce the income you need to maintain your standard of living after you stop working.
Pre-Retirement Considerations
Consider using one or more of the following strategies to maximize your retirement income:
- Invest to earn a higher rate of return on investments
- If you have lengthy time horizon until retirement, assets that have the potential for significant growth over the long term should be considered. It is important that your investment choices be consistent with the level of risk that you are willing to assume. In addition, good financial planning must always take inflation into account. If you disregard inflation, you may end up investing too conservatively. Together we can determine a suitable mix of investments that meets your objectives, time frame and risk tolerance.
- Save more
- It is hard to motivate yourself to save for retirement because it generally requires spending less money now. You will have a much better chance of achieving your retirement goal if you maintain (or even reduce) today’s standard of living and save as much as you can. Retirement planners generally suggest committing 10% to 15% of your gross earnings, or earnings before tax, to savings for retirement.
- Spend less during retirement
- Many retirement professionals estimate that you need between 70% and 80% of your pre-retirement income to maintain your standard of living during retirement. This may or may not be appropriate for you, as everyone’s goals are different. Some of your expenses will increase and others will decrease. For instance, you may spend less on business clothing and lunches, but more on vacations. Also, consider the differences in your living expenses for early and later phases of retirement. For example, you’ll likely spend more on travel when you’re 65 than when you are 85.
- Retire at a later age
- The effect of retiring later is two-fold. Not only will you have contributed to your retirement plan for more years but also your salary is also typically higher at the end of your career. Retiring early means losing retirement plan contributions based on those later, higher income amounts. This normally results in a smaller pension. Another effect of retiring early is being retired longer, and being dependent on your investments for a greater number of years.
- Maximize Contributions to Qualified Retirement Plans
- Many retirement accounts have a dual advantage; contributions are deducted from current taxable income, and the account itself grows tax deferred.
- Sources of Income in Retirement
- The following assumptions are made when determining the source of your retirement income. Generally, your retirement income begins drawing from the first item on the list, and if that particular source is insufficient, it will draw from the next item on the list, and so on:
- Social Security and defined benefit pension income are paid out based on the assumptions made in your retirement plan. Your employer-defined benefit pension benefits are based on your pension formula and years of service.
- Investment earnings on non-qualified investments.
- Non-qualified assets that do not have a growth component, such as T-Bills and CDs. These assets are redeemed in the order of lowest return rate to highest.
- Non-qualified assets with a growth component, such as stocks and most mutual funds. These assets are redeemed starting with those with the least percentage growth to the greatest percentage growth.
- Non-qualified deferred annuities.
- Qualified assets, such as IRAs and 401(k)s from lowest return rate to the highest return rate. If your income need is low during retirement, this analysis will enforce the required minimum distributions from these assets.
- 401(k) Plan
- A voluntary retirement savings plan funded primarily by the pre-tax contributions of employees. However, employers frequently match contributions to encourage participation. For example, an employer may match $.50 of every $1.00 contributed by the employee, up to 5% of salary. Designated Roth contributions can also be made after-tax.
- 403(b) Plan
- Like the 401(k), this type of retirement plan is funded primarily with employee salary deferrals. Use of this plan, however, is limited to public schools, many state, county, and city hospitals, and tax-exempt or non-profit organizations such as religious, charitable, or scientific institutions. Designated Roth contributions can also be made after-tax.
- Individual Retirement Account (IRA)
- IRAs are Individual Retirement Accounts that let your investments grow tax-deferred until you begin regular withdrawals which are required after reaching age 70 ½, but may occur as early as age 59 ½. Contributions are limited, and deductibility of contributions depends on salary level and whether the IRA owner participates in an employer-sponsored retirement plan.
- Roth IRA
- Roth IRAs are a relatively new retirement savings plan where investors contribute after-tax dollars to the account. Contributions are non-deductible, but the growth of these investments can be distributed tax-free. A Roth IRA permits tax-free and penalty-free withdrawals of earnings after five years, and withdrawals of contributions at any time. Roth IRAs are not subject to the minimum distribution requirements.
- Spousal IRA
- The Spousal IRA allows a working spouse to make contributions to an IRA for a non-working spouse, if the spouses file a joint tax return for the taxable year and the amount of compensation in the non-working spouse’s gross income for the taxable year is less than the compensation includable in the working spouse’s gross income for the taxable year. The working spouse can make contributions for a Roth IRA for a non-working spouse if the above requirements are met and the couple’s modified adjusted gross income is less than $176,000 (MFJ Only).
- SEP
- A Simplified Employee Pension (SEP) allows employers to make contributions toward their employees’ retirement. Someone who is self-employed and wants to make contributions to his or her own retirement can also use a SEP.
- SIMPLE
- Savings Incentive Match Plans for Employees (SIMPLE) plans allow certain small employers to set up a retirement plan for employees. A self-employed individual can also contribute to a SIMPLE for him or herself.
- Defined Benefit Plan
- A defined benefit plan promises a specified benefit at retirement. The employer estimates the benefit, generally based on a formula that considers length of service and compensation, and makes contributions to the plan. Your employer can estimate your projected future benefit for you to use in your retirement planning.Profit Sharing
- Profit Sharing
- A profit sharing plan need not have a definite predetermined formula for the amount of profits shared but there must be a definite formula for allocating contributions among the participants. The employer is not required to contribute any particular percentage of profits, but contributions must be substantial and recurring.
- Money Purchase Plan
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Through a money purchase plan, the employer makes a specific contribution on behalf of each participant. Contributions are fixed, and are not based on the company’s profits. The plan must have a definite, written formula for allocation to individual accounts maintained for participants.
Although there are exceptions, most retirement plans have penalties and subject to taxes for withdrawals prior to 59½ years of age and require minimum distributions no later than April 1st of the year after you turn 70½.
In reviewing your retirement needs, accurate estimates of your expenses in retirement are the key starting point. Many expenses in your pre-retirement period will end, such as office parking, business lunches, etc. On the other hand, other expenses may increase. Retirement may also have an active period early on where travel and other leisure activities are the major new expense items. The later part of retirement may include increased health care costs and reduced leisure expenses.
Next, you need to determine how best to use your various income sources in retirement. The following items need to be considered:
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Inflation
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Continue to consider inflation’s impact on the cost of maintaining your lifestyle. To maintain level spending power throughout retirement, your savings have to account for inflation up until and through retirement. This particularly impacts pension payments, which may be fixed at retirement, and social security, which may increase at a rate less than inflation.
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Beneficiary Designations