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Have
The Time Of Your Life; Considerations For Planning Your
Retirement |
Many
people spend more time orchestrating their annual vacation than
planning for retirement. But a vacation might last a few weeks,
while your retirement could feasibly last a few decades. You
probably have this winter’s vacation planned, but if someone
asked you when you’d be able to retire, would you have
an answer?
Planning for your financial future isn’t as much fun as
booking a luxury cruise. And it can be a daunting task. In fact,
many people avoid planning for this very reason. Failing to
plan, however, can prove devastating. Understanding how to get
started and what you need to decide can help make your retirement
years a dream come true.
Time Waits for No One
Getting started is the most difficult part of planning. Because
retirement seems so distant, people often procrastinate. But
your best bet is to begin today — time plays a crucial
role in retirement planning. Let’s take a look at how
the element of time affects planning.
Chad and Bruce are both 30 years old. Each would like to retire
at age 60 with $1 million in amassed wealth. Chad decides to
start his planning today, while Bruce decides he has plenty
of time and postpones saving.
Assuming an after-tax rate of return of 8%, Chad needs to save
$8,004 per year, or $667 per month, from now through the time
he retires. If Bruce waits a mere five years, he will then have
to save $12,540 per year or $1,045 per month. If Bruce instead
waits 10 years, he will have to save $20,244 per year, or $1,687
per month. And if Bruce decides to wait until age 50, he will
have to save $65,160 per year, or $5,430 per month, for the
10 years until his target retirement age of 60. Under this plan,
there’s a good chance Bruce will have to postpone retirement
if he wants to realize his savings goal. As you can see, time
is on your side — but it can also be your worst enemy.
The sooner you start saving for retirement, the better off you’ll
likely be in the long run.
Ask the Right Questions
Once you decide to do something, you must determine how to do
it. Asking yourself the right questions will help you effectively
plan for your retirement:
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How
much? To determine how much to save for retirement,
balance your current wants and needs against future wants
and needs. Then establish a savings plan that will best
help you achieve your goal. One rule of thumb is to annually
save 10% of your total income. Whether your target annual
savings amount is a percentage or an actual dollar amount,
be specific. Start with something — anything is
better than nothing. After you get used to putting away
a certain amount each month, you will find it easier to
increase the amount in the future.
If, like Bruce in our example, you decide to postpone
saving altogether, you’ll undoubtedly find it more
difficult to go from zero to $1,045 (or $1,687 or $5,430)
than you would have found it to increase an amount that
you’d already been saving. Ultimately, it is a simple
matter of priorities. The more you are able save today,
the more you should have for the future. |
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How
often? This, too, is a question of what works
for you. Remember, few people complain that they’ve
saved too much money. Generally speaking, the easiest
thing to do is to save a certain amount each month, rather
than wait until the end of the year to put away a large
lump sum. If direct deposit from your paycheck is available,
allocate a certain amount to a savings or investment account
each month. If it isn’t an option, you might benefit
from having automatic transfers made from your checking
account into the savings or investment account. Whatever
you decide, stick to your plan. |
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How
long? The answer to this question depends on
your situation. If you find that you are so far ahead
of your goal that you wouldn’t know what to do with
all the money you’ve accumulated, you can always
decide to change your strategy. That is, you may decide
you’d like to retire sooner than originally planned.
Alternatively, you may decide you’ll celebrate with
an extravagant trip. The choice is yours. Contrast this
situation with the unpleasant alternative of not having
enough retirement savings. In that case, you’d perhaps
need to continue working beyond your target retirement
date or dramatically reduce your planned retirement spending. |
Savings Vehicles
After you’ve committed to do something and have determined
an appropriate amount, you have to make a few more decisions.
Determining how to allocate the funds can be as confounding
as figuring out how much you can afford or how much you will
need in the future.
You have several options. The three most popular tax qualified
retirement savings vehicles are the IRA, the Roth IRA and the
401(k) plan. Other savings plans, such as savings incentive
match plans for employees (SIMPLEs), simplified employee pensions
(SEPs) and Keogh plans, are available. Whether these apply to
you will depend on your employer, and they are often useful
tools for business owners or the self-employed. But let’s
examine the three most common plans.
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Traditional
IRA. You can contribute up to the lesser of your
earned income or $2,000. In 2002, this amount will increase
to $3,000 and eventually to $5,000. Whether the contribution
will be deductible depends on a variety of factors. If
you are eligible to participate in an employer-sponsored
retirement plan, such as a 401(k), your IRA deduction
may be limited. Regardless of whether you are able to
deduct your contribution, any earnings grow tax-deferred
and will not be subject to income tax until withdrawn.
Any nondeductible contributions you make, however, will
not be taxed when withdrawn. You can’t make any
more contributions beginning the year that you turn 70
1/2. And, beginning in the year after you reach age 70
1/2, you’ll be required to withdraw a certain percentage
of your IRA annually. The remaining balance will continue
to enjoy the opportunity to grow tax-deferred. |
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Roth
IRA. The Roth IRA became available beginning
in 1998, and is not yet as popular as its older sibling.
While similar to the traditional IRA, the Roth IRA has
some significant differences. For example, the eligibility
requirements are different. And your contribution is never
deductible. But, growth in the account potentially is
never subject to income tax. That is, Roth IRA assets
grow tax-free rather than tax-deferred as in an ordinary
IRA. And, in what may be the most significant difference,
there is no requirement to withdraw funds at any time,
so you can maximize the benefit of the tax-free growth
during your lifetime. Further, there is no age restriction
on contributions, so you can keep adding to your Roth
IRA as long as you have earned income. The annual contribution
limit equals that of traditional IRAs, and will go up
as that limit goes up. You are currently not allowed to
put more than $2,000 total into all your IRAs for each
year. So, if eligible, you could decide to put say, $1,000
into a traditional IRA and $1,000 into a Roth IRA. This
overall limit increases to $3,000 in 2002 and eventually
to $5,000. Generally, though, choosing one and making
your entire contribution into that one will be more beneficial. |
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401(k)
plans. The 401(k) and related employer-sponsored
retirement plans are by far the most popular retirement
savings vehicles available today. In 2001, the plan may
allow you to contribute up to the lesser of $10,500 or
25% of your compensation. As a means of encouraging employees
to participate, companies may offer a "match,"
whereby they contribute a percentage of the amount that
the employee contributes, generally up to a certain maximum.
If your company offers a match, you would be wise to take
advantage of it to the greatest extent possible. Your
401(k) contributions go into the plan pre-tax, and plan
assets grow tax-deferred as in a traditional IRA. Like
a traditional IRA, you must begin taking minimum annual
distributions in the year after you turn age 70 1/2. |
Don’t
Miss Out on the Party
Today is the best time to start planning for your retirement.
Don’t procrastinate. Take the time or risk missing out
on what is supposed to be the most relaxing time of your life.
If you need assistance, please contact us. We’d be happy
to help you sort through your retirement plans.
Figures in examples do not represent any specific investment
or imply guaranteed earnings.
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