Retirement Planning

Retirement is more than just "not working." For most people, it is the beginning of their dreams. These dreams have developed over years of hard work, and they mean different things to different people. No matter what they are to you, you want to be able to pay for your future dreams, not just survive.

To learn more about planning for your retirement, click on each link below.


Are You Planning For Your Retirement?

Retirement is more than just "not working." For most people, it is the beginning of their dreams. These dreams have developed over years of hard work, and they mean different things to different people. No matter what they are to you, you want to be able to pay for your future dreams, not just survive.

During our lives, we all juggle many important financial responsibilities at the same time, but saving for your future will prove to be one of the most financially important decisions you ever make.
The Retirement Gap
Whatever your dreams, the only way to achieve them is by planning now for your tomorrows. You will need to have a general estimate of what expenses you will incur during retirement.

Planning to cover your dreams while maintaining your current lifestyle takes careful consideration, especially with the shift in expenses experienced by retirees. It's important to know that this shift is not always the anticipated decrease in expenses. After retirement, you could face excessive expenses for medical services and leisure activities that outweigh any savings you may have set aside for other purposes. Next comes the realization that your retirement income is fixed with no increases to counter inflation.

There are a lot of things to consider when estimating your future financial needs. One of the most important things to remember is that your retirement income usually falls short of what you were earning while working. It's all part of the "The Retirement Gap."

Three major factors play into the retirement gap:
1. Loss of Income
Typical retirement income is usually around 50% of your working income. Think about it. You want to fulfill 100% of your dreams, but may be bringing in 50% less income.
2. Inflation
It is important to make sure your money is keeping up with the rate of inflation.

3. Longer Life Expectancies
People today are living longer thanks to the latest advancements in medicine and healthier lifestyles. In 2000, a person reaching age 65 had an average life expectancy of 17.9 years.* You may face the fact that your retirement plan is not adequate enough to sustain you for all the years you have left to enjoy. Today, fear of outliving retirement income can tarnish the golden years.

*ALCI: Retirement Action Agenda, 2000
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What Are Some of Your Retirement Savings Options?

Many people may not be aware of the options available to assist them in their pursuit of a financially secure retirement. Let's take a look at some of the prevailing opportunities for retirement income:

1. State Sponsored Retirement Plans
Every year you work hard to set aside money for your future with help from State Sponsored Retirement Plans. However, some of these types of plans are restricted by contribution limits or fail to account for inflation. Do you really want limits placed on what you save for retirement? Many may already face a gap between current income and retirement income. Saving more today, can help fill that gap.

2. Social Security
Are you planning on using Social Security benefits for retirement? Even if you are eligible for Social Security, this benefit may not be there to support you until age 62, when one qualifies for just partial benefits.

Those seeking to retire early will find their Social Security payments reduced. The earlier you retire, the more your benefits decrease. Currently, even when you receive full benefits, Social Security only provides roughly 40 percent of pre-retirement income.* Plus, there may be a time when these benefits no longer exist, as the program's trust funds are estimated to run out by 2042.**

*Social Security Administration, www.ssa.gov
**The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds

3. Personal Savings
After years of expenses such as mortgage payments and college tuition for the kids, everyone wants to think they have enough in the bank to take care of the future. The average 50-year-old has less than $40,000 in personal financial wealth.* Can you trust that the moment to start saving will arrive in time to provide support when you need it most?

Often times, one source will not be enough. Many professionals agree that a combination of Social Security, personal savings and retirement plans is necessary to fund retirement.

4. 403(b) Plans and 401(k) Plans*
Employees of certain non-profit organizations and public schools, are eligible to participate in 403(b) plans. In some instances, 401(k) plans may be available. If you are eligible for one of these plans, you will want to contribute as much to it as you possibly can. Through salary reduction, you may currently contribute up to $13,000 (2004 tax year) per year to these plans. Your contributions will be tax-deductible. Participants in 403(b) plans may also qualify to make additional "catch-up" contributions if they have 15 or more years of service with an employer. The contribution limits are adjusted over time. Employers may make matching contributions to add to their employees' savings.

*USA Today: Money, 07/03/03

5. Fixed and Variable Annuities (Non-Qualified)
Annuities are tax-deferred insurance contracts issued by insurance companies. Fixed annuities may guarantee a minimum rate of interest each year. Variable annuities offer a variety of stock and bond investment alternatives. In both cases, your principal may be guaranteed upon death. Contributions to annuities are not tax-deductible, but their earnings are tax-deferred. Annuities provide a vehicle for tax-deferred retirement savings outside of employer-based or state retirement plans.

6. Individual Retirement Accounts (IRAs)
The maximum contribution for an individual is $3,000 per tax year or 100% of earned income, whichever is less. For a married couple filing jointly, the maximum contribution is $6,000 per tax year or 100% of earned income. Your contribution to an IRA will be tax-deductible if you are not a participant in any other retirement plan, or if you meet the family income test. Whether or not you qualify for a deductible or non-deductible IRA, your investment earnings within the IRA will not be taxed until they are withdrawn.

7. Roth IRAs
Individuals can contribute annually up to $3,000 or 100% of earned income, if less. Their Adjusted Gross Income (AGI) must be less than $95,000 a year. Married couples filing jointly may contribute up to $3,000 each if their AGI is less than $150,000 a year. All contributions to a Roth IRA are made with money that has already been taxed. All earnings on these contributions, however, are tax-deferred. The Roth IRA is a special savings vehicle because you may qualify for a tax-free distribution of the earnings. Because the principal has already been taxed, all withdrawals of principal are not subject to taxes or tax penalties.
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A Word About Risk:

Any investment program that includes stocks and bonds involves some degree of risk. Investors or potential investors must familiarize themselves with the different types of investment risks.

Market Risk: The value of your stock or bond investments may decline.

Inflation Risk: You will lose purchasing power if the returns on your conservative investments are less than inflation.

Credit Risk: The issuer of your stock or bond investment may default.

Volatility: The value of your investments will rise and fall. The degree of fluctuation depends on the characteristics of each investment.

Definitions of Possible Retirement Investments

Cash Accounts: (Bank Accounts, Certificates of Deposit and money market funds) Provide safety of principal with relatively low income.

Fixed Annuities: Issued by insurance companies and provide tax-deferred income and a guarantee of investment principal.

Variable Annuities: Issued by insurance companies and provide tax-deferred income that is based on the performance of the underlying investment choices.

Bonds: Reflect a loan made by the investor to a corporation, the U.S. government, or municipal governments. Bonds provide a high level of income with little chance of appreciation over time.

Stocks: Represent ownership in a corporation. Stocks pay dividends from the corporation's profits, which can increase or decrease over time, depending on the business operations of the corporation.

Mutual Funds: Investors turn over their money to a fund manager who pools the assets and invests them for a particular purpose. Mutual funds typically focus on a particular type of stock or bond investments. Mutual funds' income and growth prospects depend on the types of investments that they hold.

What's Right for You?*

Choosing the option that is right for you involves careful deliberation. One must take into consideration how much time is left until retirement and determine an investment risk tolerance. No one option is right for everyone. You must examine your attitude toward investments.

*For individual tax advice, consult with your tax advisor.
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Planning For Your Retirement

Answering these questions may help you determine how much money to plan for retirement:

  • At what age do I want to retire?
  • What kind of lifestyle do I want to have when I retire?

Retirement Expense

The first step is to review your Cash Flow Statement. You will make choices about what you want to spend money on during retirement, such as travel or gifts for your family. Remember, by retiring you will avoid some expenses, such as payroll taxes, and incur others, such as medical expenses.

Costs That May Decrease In Retirement

  1. Taxes: You will pay no employment taxes. Your income taxes will probably be less.
  2. Mortgage Payments: Your mortgage may be paid off or you might move to a smaller home.
  3. Job Expenses: You won't have to pay for commuting, business clothes, business lunches, etc.; Daily expenses will probably reduce.
  4. Education Expenses: You will probably have paid for your children's costs.
  5. Debt Service: You may not make as many expensive purchases.
  6. Insurance: You may not need as much life insurance by age 65.

The Best Is Yet To Come

Saving for your golden years can be a difficult process, but you've worked hard and you've made a wise decision in starting to plan for those years. Your time of relaxation and enjoyment is near. Planning now will help you secure a comfortable lifestyle for those years you want to enjoy the most.

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RETIREMENT PLANNING is sponsored by American Fidelity Assurance Company. To learn more about American Fidelity's products and services, click to visit us at afadvantage.com.