Put Your Retirement Plan on Track
Do you know how much you can expect from Social Security in retirement--or from any pension plan you have? Or how much you need to save to make up the shortfall in your desired retirement income? And are your retirement investments adequately diversified?
Whether retirement is far off or just around the corner, now's the time to get answers to all these questions and to put your retirement plan on track. Here's how to get started:
Gather information about any traditional pension plan you have
If you're covered by a traditional pension plan (the kind that promises you a specified monthly benefit at retirement), ask your pension plan administrator for an individual benefit statement that describes your total accrued and vested benefits.
Also request the summary plan description for information about how the plan operates, how benefits are calculated, when your benefits become vested, and when and how you'll receive your payments.
Keep up-to-date about your Social Security benefit
If you were born in 1938 or later, the Social Security Amendments of 1983 increased the age at which you can collect full retirement benefits:
| Year of Birth | Full Retirement Age |
|---|
| 1937 or earlier | 65 |
| 1938 | 65 & two months |
| 1939 | 65 & four months |
| 1940 | 65 & six months |
| 1941 | 65 & eight months |
| 1942 | 65 & 10 months |
| 1943-1954 | 66 |
| 1955 | 66 & two months |
| 1956 | 66 & four months |
| 1957 | 66 & six months |
| 1958 | 66 & eight months |
| 1959 | 66 & 10 months |
| 1960 | 67 |
Visit your credit union today for help in planning for your retirement.
You still can begin to collect Social Security benefits as early as age 62. However, your monthly benefit will be permanently reduced based on the number of months you'll receive benefits before you reach your full retirement age, and the amount of this reduction has increased.
For an estimate of your future benefit, watch your mail for the annual statement the Social Security Administration now automatically sends to all workers age 25 and older.
Estimate your retirement expenses
The standard advice is that, for each year in retirement, you'll need about 70% to 80% of your preretirement expenses. But with longer life expectancies and more active retirement lifestyles, these traditional formulas may leave you short.
Keep in mind that even if your kids will be out of the house and your mortgage will be paid off, other costs will increase to offset these savings, such as medical and dental expenses, long-term-care costs, and property-tax bills.
You also may have big-ticket expenses, such as travel, gifts to family or charities, care for aging parents, or home repair costs. If anything, overestimate for unexpected spending and factor in annual increases in the cost of living between now and the time you retire, as well as throughout retirement.
Calculate how much you need to save
A financial adviser, retirement planning software, or Internet calculator can help you calculate how much you need to save to make up the shortfall in your desired retirement income. Either way, you need to gather your financial records and make some key projections and assumptions.
When making your calculations, keep in mind that even the best financial advisers and computer programs can provide only an estimate of your needs. Your results will change based on your actual investment returns, actual inflation rates, tax law changes, changes in Social Security, and how long you live, among other things. The standard advice is that, for each year in retirement, you'll need about 70% to 80% of your preretirement expenses.
Make the most of your employer plan
If you have access to an employer-sponsored retirement plan, such as a 401(k), 403(b), or 457 governmental plan, make every effort to contribute the maximum allowed.
You don't have to pay income taxes on the amount you contribute until you make withdrawals, and your earnings grow tax-deferred. Plus, your employer may kick in some money in matching contributions.
You can contribute up to $13,000 in 2004 to a 401(k), 403(b), or 457 governmental plan, assuming your plan allows the maximum contribution and that you're eligible to contribute up to the annual limit. If you're age 50 or older, you also can make up to $3,000 in annual catch-up contributions, assuming your plan allows such contributions.
Contribute to an IRA
With a Roth IRA (individual retirement account), you can withdraw your earnings free from federal taxes, if you're eligible to contribute and if you meet the specified conditions. With a traditional IRA, you don't have to pay taxes on your savings until withdrawal, and, if you're eligible, you can make tax-deductible contributions.
You can contribute up to a combined total of $3,000 in 2004 to a traditional IRA or Roth IRA. If you're age 50 or older and you meet the eligibility requirements, you can also make up to $500 in catch-up contributions.
Invest regularly
Take advantage of easy ways to invest, such as employer-sponsored retirement plans and mutual fund automatic investment and reinvestment plans.
In addition to helping you invest regularly, these plans allow you to practice what's called dollar-cost averaging. By investing set dollar amounts regularly, you make the best of market fluctuations because your money buys fewer shares when prices are up and more when they're down. While this strategy doesn't guarantee profits or protect against losses, over the long term it lowers your average investment cost and increases the potential for higher returns.
Take advantage of easy ways to invest, such as employer-sponsored retirement plans and mutual fund automatic investment and reinvestment plans.
Investing regularly also helps you steer clear of the pitfalls of market timing. Trying to guess when to sell before a market downturn and when to get back in before an upswing, or when to shift money among different investments, is a game even the pros seldom win.
Invest wisely
Because you're investing for the long term, financial experts generally recommend that you invest your retirement money in a well-diversified portfolio that includes both bond and stock investments. Over the long haul, stocks historically have outperformed inflation, bonds, and other investments.
Your specific target investment mix depends on your retirement goals and your overall financial situation. More important, it also depends on your ability to withstand losses and how much risk you need to take to meet your retirement goals.
Diversifying your investments also can smooth out your portfolio's ups and downs because gains from one type of asset can offset declines in another. A well-diversified portfolio still can decline, of course, but it may be less volatile than a nondiversified portfolio.
Bobbie Shocket Lazarz, Certified Financial Planner Professional TM, MSW, MBA, is the primary author of the CUNA Mutual Group's Education Center Web site. Lazarz has been educating credit union members about personal finance for 15 years. The CUNA Mutual Group is the leading provider of financial services to credit unions and their members worldwide.
June 7, 2004
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