A Consumer Guide to Retirement Planning

Retirement Planning – Achieving Financial Security for Your Future

Retirement planning Long Island NY, is a lifelong endeavor. Recognizing this is the first step to ensuring a financially secure future. Unfortunately, the statistics show that many of us don’t realize the necessity of planning for retirement. According to a study conducted by the U.S. Department of Commerce, only 5 percent of all Americans are financially independent at age 65. This study further indicated that 75 percent of all retirees are forced to depend on family, friends, and Social Security as their only sources of income. You can protect yourself from falling into these statistics by planning NOW for your retirement. The first step: budgeting for the future

The first step: budgeting for the future

To estimate how much you will need, use your current budget as a starting point. Write down expenses, remembering that they will change when you retire. For instance, work-related expenses, such as lunches, clothing, and transportation, will be eliminated. However, you may incur additional costs for health care or even utility bills since you may be home more often. And with more free time, you may decide to spend more money on a hobby or travel.

As you project your expenses, don’t forget to consider inflation. To be safe, most experts recommend assuming a 4 to 7 percent annual inflation rate. Economists feel this level is a reasonable estimate for the next 10 to 20 years. At any rate, it is advisable to periodically recalculate how much you will need as you get closer to retirement.

Whether your expenses increase or decrease is partly up to you. Either way, be as realistic as possible when forecasting your expenditures and the resulting budget will be more accurate.

Sources of retirement income

  • Social Security
  • Employer pension plans
  • Personal retirement savings accounts
  • Personal investments

Some combination of all four sources is essential for a secure and comfortable retirement.

Social Security benefits

Social Security is the foundation on which additional retirement plans can be built. Benefits are based on your average lifetime earnings on which you paid Social Security taxes. So the more you earn, the more you collect.

Contact your local Social Security office every three years for a copy of your earnings and tax record. You can also ask for an estimate of the benefit you will receive at retirement.

Employer pension plans

Pensions are part of the fringe-benefit package offered to employees by most companies. Be aware that provisions vary from plan to plan.

One thing that all plans have in common is that they are “tax advantaged” This means that you pay no taxes on the contributions your employer makes in your name until you withdraw the money. Also, any interest you earn accumulates tax-deferred until you begin to collect your pension.

Some rules have been mandated for retirement plans. Basically, these rules shorten the time it takes for an employee to become fully vested. As of 1989, plans had to adopt either a five-year “cliff” vesting schedule or a seven-year “graduated” vesting schedule. With the “cliff” plan, you become immediately vested in five years. With the “graduated” plan, you gradually become vested over seven years, at which point you are fully vested.

Where will your retirement income come from?

Americans who hope to retire with an annual income of at least $28,714 could receive this money from the following sources:

  • Investments (interest, dividends) 33.0%
  • Earnings (wages, salaries) 26.7%
  • Pensions 20.0%
  • Social Security 18.2%
  • Other 2.1%

Personal retirement savings accounts

Personal plans are defined by the Internal Revenue Service as “qualified” retirement plans with superior tax benefits. These include:

  • IRAs-If you are not covered by any employer sponsored pension plans, you may deduct IRA (Individual Retirement Account) contributions of up to $2,000 per year if single and up to $4,000 if married. If you are covered by a company-sponsored plan, you may still be able to make a tax-deductible contribution to your IRA, depending on your adjusted gross income.
  • 401(k) Plans-The amount you contribute to a 401(k) is deducted from your gross income. Furthermore, any interest or dividends earned are tax deferred until you withdraw your money. Your plan documents should specify how much you can contribute annually.
  • Keoghs-Self-employed taxpayers may establish Keogh retirement plans. Contributions to Keogh plans are deductible and earnings accumulate tax deferred. You may contribute up to approximately 20 percent of your net self-employment income, depending on which type of plan you choose.

Personal investments

If you want to maintain your current lifestyle, your own investment holdings should make up part of your retirement income. Do some investigating to decide which investments are best for you. In selecting investments, you should consider several factors, such as risk tolerance, time horizon, liquidity needs, tax implications and diversification needs. A professional adviser, such as a CPA, can assist you in developing an investment strategy that is consistent with your investment profile and goals.

Setting financial goals

Planning for retirement requires setting concrete goals. Think about what you really want to do and how you want to live during your “golden years.” Then take a close look at your personal financial profile. Review your investments, insurance, credit rating, housing situation, and income to determine what you’ll need for your future. Devise a budget and investment strategy to help you meet those goals. If you need advice, contact a professional financial adviser, such as a CPA.

The information in this publication is for general purposes only. You should consult your CPA for specific recommendations appropriate to your individual situation.

The question is ”when?”

Deciding when to retire is influenced by many factors. One consideration is life expectancies. The present life expectancy is nearly 80. However, the Census Bureau expects the percentage of those age 85 or older to double within the next few decades. As a result, many more people will need retirement income for as many as 20 to 30 years.

Another factor to consider in planning when to retire is Social Security, which is still based on a full retirement age of 65. As long as you were born in or before the year 1937, you have three options:

  • Retire between 62 and 65 on a reduced benefit
  • Retire at 65 on a full benefit
  • Continue working and get a bonus for each year of work past your 65th birthday up to age 70

The law was changed in 1983 to slowly raise the age at which workers can retire to 67 years old. If you were born between 1938 and 1960, the age at which you can retire with full benefits gradually rises every year until it hits age 67.

How much money will you need?

Experts estimate that in order to retire with financial security, you will need at least two-thirds of your pre-retirement income. Even so, three-quarters provides a more comfortable margin. In any case, CPAs recommend that you consider these factors in your estimates:

  • The number of years you plan to be retired
  • The lifestyle you would like during those years
  • The rate of inflation between now and the day you retire

If determining how much money you will need seems impossible, don’t despair. A CPA can help you minimize the guesswork.

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