Retirement Planning

Retirement can be a great joy if you can figure out how to spend time without spending money. — Unknown wise person

Will you be able to live comfortably on your retirement income? It is important to remember that the cost of things like food, travel, entertainment and medical treatments do not go down as your enter retirement.

Most Americans are simply unprepared for retirement and are planning on staying in the workforce longer to make up the shortfall in savings. 27 percent of American has less than $1,000 in savings, while more than half (54%) have less than $25,000 saved. U. S. workers are simply pushing back their retirement with 25 percent reporting delaying their retirement for at least a year. You can find much more about the topic of retirement planning by reading chapter 11 of Family Financial Freedom.

While less than half of all American workers have begun to save for retirement, they can expect to live 18 years in retirement. While it is never too soon or too late to save for retirement, many people put it off until about ten years before they expect to retire. At that time they are usually at their peak earning potential and may able to reduce or eliminate mortgage and credit card debt.

The Cost of Retirement

People who do not save for retirement during their employment years may face disappointment in the quality of life during their retirement years.

Retirement is expensive. Experts estimate that you’ll need about 70% of your pre-retirement income - lower earners, 90% or more - to maintain your standard of living when you stop working. For someone who makes $50,000 per year, that’s $35,000. Others push that figure higher. The Employee Benefit Research Institute polled retirees, and found 55 percent of them said they needed an annual income equivalent to 95 percent of their pre-retirement earnings.

Three common sources of retirement income include:

• Social security benefits

• Employer-sponsored retirement plans

• Personal savings and investments

If you expect your retirement money to come from Uncle Sam, you’re in for a disappointment. Social Security typically replaces 40 percent of workers’ pre-retirement income, according to the National Academy of Social Insurance, a nonpartisan policy group. If you work for a company with a pension plan, then you can expect a pension to provide another 20 percent. So now you are might be up to 60%, where do you get the rest that you might need to enjoy your retirement?

It is important for you to supplement social security and pension income with personal savings and investments. But being able to save for retirement is becoming more difficult. Financial counselors find a growing number of older Americans, in or nearing retirement, mired in debt and seeking debt counseling with little or no money set aside for retirement.

You should begin financial planning for retirement well ahead of the last day you work. In fact, the earlier you begin to plan, the more choices you have and the greater are your chances for a successful retirement.

Retirement planning is much like planning a trip. Any plan begins with establishing your destination, or goal, and a timetable for taking each step toward that goal.

Fortunately various retirement plans offer tax-free or tax deferred savings options. Tax deferral is encouraged by the government to stimulate long-term planning, specifically so we will have taken the steps needed to save for retirement.

Individual Retirement Accounts (IRAs), ROTH IRAs, 401ks and other qualified plans all benefit from tax deferral.

Generating Tax-Deferred Income

Tax deferral is an extremely attractive part of funding a retirement plan.

All of the income earned on the principal of your investments (the money you contribute) is allowed to compound tax-free until you are ready to take withdrawals. Only at the time you withdraw the money do you become liable for taxes on the earnings.

The government has decided to provide these tax-deferral benefits to stimulate people in making the choice to invest in retirement accounts. In addition many insurance related investments such as annuities and universal life insurance contracts include the benefit of tax deferral.

Income from your contributions can grow even faster if you elect to make contributions into tax-deferred accounts at the start of each year, rather than monthly contributions or waiting until the last minute. If for example you invest $2,000 into your IRA in January of each year and earn 8 percent interest, after 30 years you would have $244,692. If you invest into your IRA at the end of the year, you would have $224,566, a lose opportunity of over $20,000 dollars ($20,126).

The Reality of Social Security

Retirement incomes typically come from three major sources—Social Security, pensions and salary reduction plans, and savings and investments.

Those who plan to work part-time can consider those earnings as a fourth source.

Social Security

Most people expect to collect Social Security benefits in retirement, either on their own work record or as the spouse of a worker. The amount of the check you get as a retired worker is based on your covered earnings during your working years.

The normal retirement age for people retiring has been age 65. Social Security calls this a full retirement age, and the benefit amount that is payable is considered the full retirement benefit. Because of longer life expectancies, the full retirement age was increased in gradual steps until it reaches age 67. This change started in the year 2003, and it affects people born in 1938 and later.  You can find several helpful calculators to determine your benefits at the Social Security Administration website. 

Your Social Security benefits will be reduced if you retire early, before 65 (or the applicable delayed normal age), and increased if you delay retirement past 65 (or the applicable delayed normal age).

You are eligible to collect Social Security retirement benefits if you are at least 62 and you have covered earnings for enough years. Laws governing eligibility as well as how benefits are calculated have been changed several times and will undoubtedly be changed again, so you need to keep track of changes and how they affect you.

Public pension offset. If you work in the public sector, you may become eligible for a public pension rather than Social Security. If you receive a public pension, your spousal or survivor Social Security benefits may be reduced.

Securing Your Retirement