Volume 3, Issue 9
Assembling the Pieces of Your Retirement Puzzle
If life is a journey, retirement is the destination where one hopes to enjoy hard-earned rewards for years of work. However, a successful retirement doesn’t just happen. It requires a proactive financial plan.
Pieces of the Retirement Puzzle
Retirement planning is like a jigsaw puzzle. Once you fit together all of the interlocking pieces, you will be able to develop the best retirement plan for your specific needs. Consider the following four pieces of the retirement planning puzzle:
1. Social Security—Most working Americans will receive Social Security benefits based on how long they have worked, how much income they have earned, and at what age they choose to retire. Generally, Social Security provides only a base level of retirement income.
2. Employer-sponsored pension plans—If you have a pension plan at work, also called a defined benefit plan, your employer provides a retirement benefit in the form of either monthly income or a lump sum. The amount of your benefit is generally based on your salary, length of service, and a benefit formula that averages the employee’s earnings over a prescribed period of years.
3. Employer-sponsored retirement plans—If your employer sponsors a defined contribution plan, such as a 401(k), you may contribute a percentage of your pre-tax income to a retirement account, as defined by the company plan. Your employer may elect to match a percentage of your contributions, as well. Earnings have the potential to grow tax-deferred.
4. Personal savings—Personal retirement savings may be the key to achieving your financial goals. A disciplined savings program can help you accumulate additional assets to supplement Social Security benefits and employer-sponsored plan funds.
Taking Action
Your first step is to assemble the pieces of your retirement planning puzzle to determine if your projected income and assets will be sufficient to fund a comfortable retirement. If so, continue planning for future expenses and regularly review your retirement strategies to ensure that your plan is appropriate for your circumstances. If you currently expect a funding shortfall, develop strategies to meet your goals and begin working toward them now.
Although Social Security and any employer-sponsored pension plan offer relatively fixed benefits, you may be able to increase your 401(k) contributions and personal savings to supplement any expected shortfall. Regular contributions and tax-efficient vehicles can help you build your assets over time.
If possible, maximize contributions to your 401(k) or other employer-sponsored retirement plan. Keep in mind that contributions to a 401(k) come from pre-tax salary, and taxes on both contributions and earnings are deferred until you retire. Individuals under age 50 may defer up to $16,500 in 2010, and those 50 and older may defer up to $22,000.
You may also choose to contribute to an Individual Retirement Account (IRA). Up to $5,000 may be contributed to an IRA or a combination of IRAs in 2010, and those 50 and older may contribute an additional $1,000. Contributions to a traditional IRA may qualify for a tax deduction, and earnings have the potential to grow tax deferred. However, taxes will be owed on withdrawals in retirement, without penalty if you are over age 59½. Contributions to a Roth IRA are not tax deductible, but earnings have the potential to grow tax free. Distributions in retirement are also tax free, provided you have owned the account for five years and are at least age 59½.
Whether you are in your 30s, 40s, or 50s, now is the time to start planning for your retirement. A review with your financial professional can help you determine your future needs and devise a strategy to meet those needs. The sooner you begin putting your retirement planning puzzle pieces together, the better your chances for a truly “golden” retirement.