1. WEALTH CARE KIT SM Retirement Planning A website built by the National Endowment for Financial Education dedicated to your financial well-being.
2. “ W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g The headlines if not longer. For some, retirement paint a grim can last almost as long as their working years, particularly if they MANY FACTORS ACCOUNT picture— retire early or joined the workforce late in life. Assuming good health, FOR CHANGES IN their retirement years are likely RETIREMENT PLANNING, “Most Americans Ill-Prepared for Retirement.” “Retirees Face Cloudy Sunset.” “Social Security May Go Broke by 2041.” While elements of the truth may lie BUT TWO STAND OUT: INCREASED LIFE EXPECTANCY AND INFLATION. “ to be more active than those of previous generations, often requiring still more money. The impact of this increase in retirement years wouldnt be nearly so powerful if it wasnt for these behind these headlines, don’t be significant factors: the diminishing discouraged. Chances are good that number of pensions available you’ll have a financially comfortable today, the steady increase in health- retirement if you start planning confident that Social Security and care costs, and inflation. While adequately today. Medicare will continue to provide inflation —commonly referred to as benefits equivalent to those First, let’s look at some of the the rise in the cost of living—has received today. facts behind the headlines: been low in recent years, it has the • According to a recent national • Americans say they are counting potential to increase in the future, survey, more than half of American on money from savings perhaps just as you are about workers report that they are saving and investments as retirement to enter retirement. for retirement, yet of those, the income, yet the personal saving What do these factors mean majority has saved less than rate in the U.S. was less than 2 for your efforts to have your Golden $50,000, and almost one-half of all percent in 2004, a very low rate. Years be truly golden? More than workers have saved less than • Fewer and fewer companies are ever before, you must take charge of $25,000 toward retirement. providing traditional pension your retirement future. Especially • About 40 percent of those plans (guaranteed monthly pay- important is to strengthen your surveyed report that they have ments, usually based on pay), personal savings, and investments. calculated how much money they but many of these businesses are will need to save by the time they providing alternatives, such as GETTING STARTED retire, but their calculations often 401(k) plans. Such plans depend So where do you start? Retirement do not include a realistic estimate on annual employer and employee planning is a complex and critical of how long they will live in contributions and the performance aspect of financial planning. While you can and should take retirement or how much they can of the invested assets. charge of your own retirement count on Social Security. destiny, you may need professional CHANGING DEMOGRAPHICS assistance along the way for such • Social Security makes up less AND LIFE EXPECTANCY things as investment advice. As you than half of the retirement needs Many factors account for these near retirement, advice on the tim- for the majority of Americans. and other wrenching changes in ing of retirement distributions to For example, assuming you retirement planning, but two stand avoid penalties and minimize taxes maintain the same lifestyle out: increased life expectancy can be crucial. A financial planner expenses, Social Security would and inflation. can help you assess where you are, provide roughly 40 percent of your where you want to go, and how you retirement income. As little as a generation ago, people can get there. But first, familiarize didn’t expect to live much beyond yourself with the following five • The average Social Security the normal retirement age of 65. steps—the same steps the planner benefit was $950 per month in Today, a person living to age 65 will take in greater detail—and fill 2005. Many workers are not can expect to live another 20 years, out the simplified chart at the end of this section.1 © 2001, 2005, 2009 National Endowment for Financial Education
3. “ W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g 1. Set your retirement goals. 4. Estimate how much you’ll This may not be easy if you are need to save to fund your many years from retiring, but retirement. Subtract your annual give it a try anyway. What kind of Social Security estimate and any retirement do you envision? Exotic MORE THAN other inflation adjusted retirement travel? Puttering in the garden? EVER BEFORE, income sources from your annual Starting your own business? Part- time work? Early retirement? Selling the house and moving to a warmer climate? Spending time with your grandchildren? Volunteering? YOU MUST TAKE CHARGE OF YOUR RETIREMENT FUTURE. “ retirement income needs. The difference is what you must fund out of your investments and any employer-sponsored savings plans. After considering the amount you’ll get from other investments and pension benefits (which you can 2. Estimate annual retirement estimate based on information expenses. While it is best to seek from your current company’s a financial professional’s help with employee benefits/personnel officer calculations, a very rough rule of of your retirement income, forcing and/or from past employee thumb for maintaining your current your investments and personal records), compare your financial lifestyle in retirement is that you savings to make up the difference. resources to your retirement income will need 80 to 100 percent of your needs (see the chart at the end of present income, adjusted upward Every year, you should receive an estimate of your Social Security this section). for inflation each year during retirement. While some costs, such benefits from the Social Security Administration. (If you don’t, call 5. Make adjustments. If current as income taxes and housing (if your and projected resources won’t house is paid off), may decline, 1-800-772-1213.) The Personal Earnings and Benefit Estimate provide the necessary income, you’ll others, such as health care and need to make adjustments. Options travel, are likely to rise. The lifestyle Statement will show your earnings records, your work credit, and an include saving more by increasing goals you listed in Step 1 and current income or reducing the costs associated with them will estimate of benefits. You also can request this information by visiting expenses, increasing the return on have a lot to do with estimating your investments, selling your home your future expenses more precisely. www.ssa.gov. For information on your pension plan, talk to your when you retire, working part time When looking at your own finances, during retirement, retiring later, or consider a broad spectrum of retire- company’s benefits specialist/per- sonnel representative. lowering your projected standard of ment issues. living during retirement. Be sure to plan well beyond What is the current total value age 65. As mentioned on page 1, if of your taxable and nontaxable OTHER RETIREMENT your lifestyle costs $45,000 at age savings and investments that you CONSIDERATIONS 45, you’ll need over $98,000 at can devote to retirement, including The high cost of health care is a age 65 to stay even with four percent employer-sponsored retirement concern for many people facing inflation. By age 75, you’ll need plans? If you have a defined contri- retirement. Medical expenses can almost $117,000 a year, assuming bution plan, project the average destroy the best of retirement plans. only 80 percent of your pre- return of investments in your Medicare, which covers hospitaliza- retirement income level and account to determine how much tion and doctor’s fees, generally 4 percent inflation! personal savings you will have provides slightly over half of the accumulated by retirement age. health-related costs of people age 65 3. Determine potential Then project how much income and over. Private Medigap insurance resources. Calculate the amount of you can realistically expect from can help supplement the govern- income that Social Security and your your plan. Are there other potential ment program. pension plan (if any) will provide in resources, such as an inheritance, today’s dollars. But, while Social a business you will have an interest Medical care is of special concern if Security adjusts annually for infla- in or sell, or rental property? you retire early, since you won’t tion, most pension plans do not. Discussing these matters and mak- have access to Medicare until age Over time, your pension benefits ing rough calculations with a 65. Many companies are reducing or will make up a declining portion financial planner can help you dropping medical benefits offered to reach safe retirement ground.2 © 2001, 2005, 2009 National Endowment for Financial Education
4. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g their early retirees. You may have in property management and will tion plans, such as 401(k)s and to extend coverage through your reduce probate costs, but will not tax-sheltered annuities/403(b)s ex-employer’s plan via COBRA save estate taxes. (for employees of schools and rules, buy private insurance, or nonprofits), can build significant consider going back to work to get As you can see, retirement planning retirement funds, especially if you into a health plan. requires consideration of many contribute as much as possible to Expensive long-term nursing components. Pulling them together them. In many cases, the employer home care can devastate a retire- mandates careful planning. will match your contributions. Even ment plan. Depending on the size with this attractive benefit, almost of the estate and other factors, a fourth of eligible employees don’t KEYS TO A financial planners advise many participate. people to buy a long-term-care COMFORTABLE insurance policy to cover some of If you’re self-employed, set up your own tax-deferred retirement RETIREMENT this risk. Working after retirement is becoming increasingly common as account, such as a Keogh plan, traditional sources of support, such simplified employee pension plan as Social Security, become less (SEP), savings incentive match plan With these steps in mind, here are for employees (SIMPLE), or IRA, and viable. a few strategies for making your contribute the maximum amount possible. ESTATE PLANNING TOOLS retirement years more financially A variety of estate planning tools sound. Take advantage of nondeductible can be invaluable in protecting education IRAs, nondeductible Roth your retirement nest egg from PAY YOURSELF FIRST IRAs, and the liberalized rules for unnecessary medical, legal, or Even if you’re trying to save establishing IRAs. See your tax financial expenses. money for your children’s college advisor for more details. A durable power of attorney is a education, a home, or other legal document which ensures that financial goals, regularly set aside HAVE A CASH RESERVE if you can no longer manage your money for retirement. It is best to Remember, have a cash reserve financial and personal affairs, a determine a fixed amount to save set aside, preferably enough to designated representative, i.e., regularly. Financial planners cover three to six months of agent, can act on your behalf. recommend saving about 10 per- expenses, so that you don’t need cent per year, depending on your to dip into your retirement A living will is a statement of age, other resources, and lifestyle contributions for extra money and your personal wishes as to what goals. pay the penalty associated with it. life-sustaining medical treatment While you should check with your you want or don’t want should you START SAVING employee benefits/personnel become terminally ill and comatose. IMMEDIATELY representative and your tax Without it, you could end up Start saving immediately! If you preparer to make sure of penalties incurring medical expenses and invest $10,000 in a tax-deferred that would apply, most workers medical treatment you may account at 8 percent at age 35, it who take plan distributions prior to not want. will grow through the power of retirement face a short-term compounding to $100,627 by the A medical durable power of attorney problem: they must pay more time you retire at age 65. If you (sometimes called a healthcare taxes. The plan trustee may have wait until age 50, you’ll need to proxy) combines the above docu- to withhold 20 percent for the IRS invest $31,722 at 8 percent to see ments. In it, you designate a from the distribution. Additionally, it grow to the same amount by representative to make medical the 10 percent early withdrawal age 65. decisions on your behalf in penalty may apply to those under accordance with your wishes stated age 59 1/2. This withholding MAXIMIZE CONTRIBUTIONS in this power of attorney. problem and any 10 percent early Maximize contributions to tax- withdrawal penalty can be avoided Depending on the size and complex- deferred retirement plans available by making a direct rollover to an ity of your estate, revocable trusts to many working people through IRA or any other qualified can be a useful alternative to a their employer. It’s the best tax retirement plan. durable power of attorney to assist shelter around. Employee contribu-3 © 2001, 2005, 2009 National Endowment for Financial Education
5. “ W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g INVEST TO BEAT fully. The law imposes special INFLATION & TAXES restrictions on the amount of Invest to beat inflation and taxes. lump-sum distributions that may be This means investing a significant made from a defined benefit plan. portion of your funds in growth assets, such as stocks, compared to WHICH OPTION YOU Therefore, annuity payments (assuming normal longevity) may be PURSUE DEPENDS ON low-yielding CDs. By diversifying and investing for the long term (five years or longer), you can minimize investment risk. When approaching retirement, many people move into “safer,” lower- earning, fixed-income investments. YOUR NEEDS. PROFESSIONAL ADVICE ABOUT THESE ISSUES SEEK “ more valuable than a lump-sum distribution in some defined benefit plans. Which option you pursue depends on your needs. Seek professional advice about these issues. However, because retirement DON’T STOP INVESTING may last 20 years or more, it’s AT AGE 65 important that even retirees keep Don’t stop investing at age 65. some money in stocks to stay even take advantage of it. Often, if the Remember, you’re likely to have a or ahead of inflation. company matches an employee’s long retirement. contribution, the worker makes a MAKE YOUR TAX-DEFERRED 50 percent gain on his or her DON’T TOUCH MONEY WORK HARD contribution immediately with Don’t touch your retirement funds If you have investment control, no risk! except for retirement. Participants make the money in your tax- often tap their retirement accounts deferred plan work hard. The CHOSE YOUR to buy a home or to fund their ultimate size of your retirement BENEFIT CAREFULLY children’s college education, even account depends on two factors: If you belong to an employer- to buy a car. Of those who receive the amount of contributions and sponsored retirement plan, choose their pension money in a lump sum the earnings on those contribu- your benefit carefully when you upon early retirement or when they tions. Many plans offer investment retire. Typically you’ll have to change jobs, only about one-third alternatives. Follow the same choose to (1) receive monthly roll it over into an IRA. investment advice given earlier: payments and pay taxes based diversify and put a significant Realize the resulting figure is a on a ratio, (2) withdraw the funds portion of your money in other rough estimate, which assumes in a lump sum and pay taxes on equities (not just in your company’s expenses and income sources do them, or (3) have the plan trustee stock). And if your plan allows not increase with inflation. You and roll the funds over into an IRA to employee contributions and your planner then can determine defer taxes, which you then control company matching, be sure to the amount you must save annually.4 © 2001, 2005, 2009 National Endowment for Financial Education
6. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g STARTING THE PROCESS STEP 1 Begin retirement planning by getting yourself ready to talk with a financial professional. Use the simplified chart that follows. • Set your retirement goals. • What do you foresee for your retirement lifestyle? If married, discuss this with your spouse. • How many years until I/we want to retire? • Where will I/we live after retirement? • How many years will I/we be retired? • What kind of activities and lifestyle do I/we want after retirement? STEP 2 Estimate annual retirement expenses and your pre- and post-retirement budgets in today’s dollars. Your planner will adjust these amounts for inflation and help determine if your numbers are realistic. Now Type of Expense During Retirement $________________ Housing utilities $________________ $________________ Food $________________ $________________ Clothing, personal $________________ $________________ Entertainment, travel $________________ $________________ Medical, dental $________________ $________________ Car transportation $________________ $________________ Insurances $________________ $________________ Gifts, contributions $________________ $________________ Taxes $________________ $________________ Total (today’s dollars) $________________ STEP 3 Determine potential resources. List your sources of retirement income in today’s dollars. Your financial planner will adjust them and help you determine if your estimates are realistic. $/Year Social Security retirement benefits $________________ Pension or profit sharing from employer(s) $________________ IRA, TSA, 401(k) plans we contribute to $________________ Income from investments shown in Step 4 (below) $________________ Part-time/Full-time work during retirement $________________ Other retirement income (list source): Total Annual Retirement Income (today’s dollars) $________________5 © 2001, 2005, 2009 National Endowment for Financial Education
7. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g STARTING THE PROCESS cont. STEP 4 Calculate how much you’ll need to save to fund your retirement. List your regular savings and investments that are earmarked just for retirement. The time value of money comes into play here. • Every month, I/we save $ in my/our 401(k)/mutual fund/etc., which totals per year. • My/our retirement investments are worth $ at present. STEP 5 Estimate annual retirement expenses and your pre- and post-retirement budgets in today’s dollars. Your planner will adjust these amounts for inflation and help determine if your numbers are realistic. National Endowment for Financial Education, all rights reserved. CFP and CERTIFIED FINANCIAL PLANNER are federally registered marks of the Certified Financial Planner Board of Standards, Inc.6 © 2001, 2005, 2009 National Endowment for Financial Education