Retirement planning has taken on many new dimensions today that never had to be considered by earlier generations. For starters, people are living longer. A person who turns 65 today could be expected to live 20+ years in retirement as compared to a retiree in 1950 that lived considerably less. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Needs – providing a steady stream of income that cannot be outlived is now more important than ever. With the prospect of paying for retirement needs for as many as 20 years, retirees need to be concerned with keeping up with the cost-of-living.
Health Care Needs - Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Medicare; however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today.
Estate Protection - Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with settlement costs and sizable death taxes, which could force liquidation if the proper planning is not done.
Paying for Retirement - Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings and/or investments. A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.
Social Security - was established in the 1930’s as a safety net for people who paid into the system from their earnings during their working years with the hopes of relying upon a steady stream of income in retirement for the rest of their lives. Originally “normal retirement age” was 65 now, for a person born after 1937, the normal retirement age is being gradually increased until it reaches age 67 for all people born in 1960 and beyond. If a person continues work and/or delays receiving benefits, they could be entitled to a larger social security benefit. Likewise, people who retire as early (age 62) will receive reduced early retirement benefits.
Will Social Security be here for you?
It is projected that by 2034 the Social Security trust fund will only be able to pay 79% of its’ benefits. Choose your benefits wisely and know what you’re entitled to. You still have a lot of choices available to you. Know about all the benefits you are entitled to and Don’t leave any Money on the table.
- Age Choices
- Collecting before or after normal retirement age
Request “The Baby Boomer’s Guide for Social Security”
Retirement Plans – The days of employer-sponsored retirement plans are less frequent today; however, if you have one you are fortunate. They are often employer funded and offer you retirement benefits that can vary based on salary and years of service They often provide various payout options that need to be chosen carefully upon retirement and cannot be changed once you have decided.
Other retirement plan options include 401(k) plans, a Simplified Employee Pension Plan, 403(b) plans and 457 defined contribution plan. These plans are employee contributory and some plans have a profit sharing plan attached to these plans and they may also offer an employer contribution that matches a percentage of your salary based on your contributions. These are qualified plans, which means the contributions you are deductible from the employee’s current income (pre-tax). The amount of income received at retirement is based on the total amount of contributions, the investment returns earned, and your retirement time horizon.
Individual Retirement Accounts (IRA) are tax qualified retirement plans that are established to enable individuals to save for retirement with the same tax favored manor as employer sponsored plans. The traditional IRA allows for contributions to be made on a tax-deductible basis and to accumulate without current taxation of earnings inside the account. Distributions from a traditional IRA are income taxable.
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if distributions are taken prior to reaching 59 ½, may be subject to an additional 10% federal tax penalty
A Roth IRA is different from a traditional IRA in that the contributions are not tax deductible. However, the earnings growth and distributions are not taxable either. To qualify for tax-free and penalty-free withdrawals, a Roth IRA must be established for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum).