Retirement Planning

Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people live longer, and inflation and rising income taxes constitute a significant problem. A person who turns sixty-five today could be expected to live as many as thirty-five years in retirement compared to a retiree in 1950 who lived, on average, an…

Retirement Planning continued…an additional 15 years.  Longer life spans have created several new issues to consider when planning for a successful retirement.

Guaranteed Lifetime Income NeedThere is a lifetime after retirement, and providing a steady income stream that cannot be outlived is more important than ever.  With the prospect of paying for retirement needs for as many as thirty-five years, retirees must be concerned with maintaining their cost of living adjusted with inflation and taxation.  

Health Care NeedsLonger life spans can also translate into more health issues in 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 severe disability or chronic illness is becoming an essential element of retirement plans today. 

Estate ProtectionPlanning 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 decedent's wishes. 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 RetirementRetirees who have prepared for their retirement usually rely upon three primary sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their savings 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 SecuritySocial Security was established in the 1930s as a safety net for people who could rely upon a steady stream of income for the rest of their lives after paying into the system from their earnings.  When the income benefit started, the retirement age was initially sixty-five, referred to as the “normal retirement age.”  Now, for a person born after 1937, the average retirement age is increasing gradually until it reaches age sixty-seven for all people born in 1960 and beyond.  The amount paid in benefits is based on an individual's earnings while working.  If a person wanted to continue to work and delay receiving benefits, they could do so to build up a more considerable benefit.  Conversely, at a reduced level, early retirement benefits are available as early as sixty-two.

Employer-Sponsored Qualified PlansMost employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of his earnings into an account that will accumulate until retirement.  The contributions are deductible from the employee’s current income as a qualified plan.  The income received at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon.  As in all qualified plans, withdrawals made before age fifty-nine and a half may be subject to a ten-percent penalty on top of ordinary taxes due. 

Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan, or, in the case of a non-profit organization, a 403(b) plan.

Traditional And Roth IRAsIndividual Retirement Accounts (IRA) are tax-qualified retirement plans that were established as a way for individuals to save for retirement with the benefit of tax-favored treatment. The traditional IRA allows contributions to be made on a tax-deductible basis and accumulate without current taxation of earnings inside the account.  Distributions from a traditional IRA are taxable.  A Roth IRA is different because the contributions are not tax-deductible. However, the earnings growth is not currently taxable. To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age fifty-nine and a half or due to death, disability, or a first-time home purchase (up to a ten thousand dollar - lifetime maximum).  Depending on state law, Roth IRA distributions may be subject to state taxes.

Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken before reaching fifty-nine and a half, may be subject to an additional ten percent federal tax penalty.