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Retirement Planning

Why save for retirement?

Because people are living longer. According to the U.S. Administration on Aging, persons reaching age 65 have an average life expectancy of an additional 19.3 years.* And since Social Security replaces only about 40 percent of total aggregate income for aged persons,** Social Security alone may not be enough to see you through your retirement years.

*Source:  NCHS Data Brief, Number 229, December 2015

**Source:  SSA Publication No. 05-10024, March 2016

There is no guarantee that working with a financial professional will improve investment results.

Retirement Planning--The Basics

You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to help get you started.

Determine your retirement income needs

It's common to discuss desired annual retirement income as a percentage of your current income.  Depending on who you're talking to, that percentage could be anywhere from 60% to 90%, or even more.  The appeal of this approach lies in its simplicity.  The problem, however, is that is doesn't account for your specific situation.  To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.2 percent. (Source: Calculated from consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2016.)

And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses may drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses could help tell you about how much yearly income you may need to live comfortably.

Calculate the gap

Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income could fall short of what you need, the rest would have to come from additional personal retirement savings.

Figure out how much you'll need to save

By the time you retire, you'll need a nest egg that could provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

  • At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.
  • What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.
  • What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.
  • Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

Build your retirement fund: Save, save, save

When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a rate of return that you are comfortable with, and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement could help reduce the risk of impulsive or unwise spending that could threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options

You need to understand the types of investments that are available, and decide which ones are right for you.

If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she can explain the options that are available to you, and can assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon.

Use the right savings tools

The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans allowing employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. Both 401(k) and 403(b) plans can also allow after-tax Roth contributions. While Roth contributions don't offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax-deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying and financial strength of the issuing insurance company).

Note:  In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to taxable distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).


Securities, insurance and advisory services offered through Royal Alliance Associates Inc., member FINRA/SIPC.  Gateway Investments, LLC is a marketing designation.


IMPORTANT DISCLOSURES

Royal Alliance Associates, Inc. does not provide tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of AL, AZ, CA, CO, CT, DC, DE, FL, GA, ID, IL, ME, MD, MA, MI, MN, MS, MO, NV, NH, NJ, NM, NY, NC, OH, OK, OR, PA, PR, RI, SC, TX, VA and WI. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.



 
 
 
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Securities, insurance and advisory services offered through Royal Alliance Associates Inc., member FINRA/SIPC.  Gateway Investments is a marketing designation.


This communication is strictly intended for individuals residing in the state(s) of AL, AZ, CA, CO, CT, DC, DE, FL, GA, ID, IL, ME, MD, MA, MI, MN, MS, MO, NV, NH, NJ, NM, NY, NC, OH, OK, OR, PA, PR, RI, SC, TX, VA and WI. No offers may be made or accepted from any resident outside the specific states referenced.
 


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