Plan for Your Retirement
Pensions were developed in European countries early in the 19th century. They arrived in the United States in 1875. By 1997, about half of all workers had pension plans. Originally, employers offered pension plans to provide deferred income to employees after they retired. By the 1990s, more employers turned to 401(k) plans that encourage employees to contribute to their own retirement funds. Now, in many companies, pension plans are falling by the wayside.
Whether or not you have an employer pension, a successful retirement plan begins with understanding your retirement benefits. Look at every aspect of your anticipated retirement income, determine how much income you will need to retire, and arrange to fill any gaps so you can enjoy your golden years.
Below are five tips to help you plan for your retirement. If you are a worker who is closer to retirement age, see the "Retirement countdown" below.
Understand the pension
Two types of pension plan exist. A defined contribution plan means the employer places an amount of money in a retirement account on the employee's behalf. With a defined benefit plan, the employer promises the employee will receive a certain amount of funds (benefit) upon retirement.
Defined benefit plan funds are customarily insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency to which employers pay premiums. In 2006, 43 percent of workers participated in a defined contribution plan, while 20 percent participated in a defined benefit plan. In recent years, the 412(i) pension plan has become a viable retirement savings vehicle for successful small-business owners.
Add the value of a 401(k) plan
Some organizations offer a defined contribution plan -- such as profit-sharing or other investment -- as well as a 401(k) plan. Employees contribute to the 401(k) plan, and employers may or may not match their contributions. Online calculators can help estimate the eventual value of your plan at the time you retire. Example: Retirement Planning Calculator
Evaluate Social Security
Younger workers tend not to count on Social Security, however they should still understand current planned Social Security benefits. Workers automatically receive a summary of their estimated Social Security benefits annually a few months before their birthday. For most people, these benefits will not be enough to support their current lifestyle during retirement. The Social Security summary is a great annual reminder to contribute to your own retirement investments.
Look into IRAs
An IRA (individual retirement account) allows workers to save for their own retirement, instead of or in addition to an employer retirement plan. People under age 50 can contribute up to $5,000 per year; those 50 and older can contribute up to $6,000. Depending on income, contributions can be made tax-free (with a traditional IRA) and taxed upon withdrawal, or made after taxes (Roth IRA) and withdrawn tax-free during retirement.
Calculate needs
A ballpark estimate is that retirees will need 70 percent to 80 percent of their peak annual salary for a comfortable retirement. Add up anticipated expenses: costs for home payments and maintenance; food, clothing, utilities, transportation and other necessities; hoped-for expenditures on luxuries like dining out and travel; and a realistic estimate of medical expenses. For a personalized blueprint, a financial planner can help craft a detailed plan for retirement and beyond.
Retirement countdown
To assist workers who plan to retire within a decade, use this 10-year retirement planning countdown:
• 10 Years to Go: Put affairs in order. Carefully evaluate assets and debts. Consult a financial planner, or at least an online retirement calculator, to determine how much money you need for retirement. Have you saved enough? Do you have excessive debt? Compare where you are with where you need to be.
• 9 Years to Go: Be sure disability insurance is in place to protect income during your working years. Most employers provide this coverage, or individuals can secure their own insurance until retirement age.
• 8 Years to Go: A mortgage-free home can be a tremendous asset for retirement: It eliminates the need for a housing payment, and, for some individuals, can provide a resource for cash flow through a reverse mortgage. (Reverse mortgages allow qualified homeowners over age 62 to borrow against the value of their home, with the borrowed amount repaid from equity after the owner's death.) Plan to accelerate paying off a mortgage, if possible, by applying any available funds to the principal.
• 7 Years to Go: Focus on building a financial cushion, including fully funding retirement plans. All Americans can contribute up to $16,500 annually to employer-sponsored, tax-deferred 401(k) retirement plans. Individuals over age 50 can save $5,500 more in "catch-up" contributions.(2) Those without an available 401(k) plan can save $5,000 per year in an IRA (individual retirement account), or $6,000 for people over age 50.(3) Also, build an emergency fund of six months' expenses in an accessible account.
• 6 Years to Go: Consider purchasing long-term-care insurance coverage. This insurance covers expenses, at home or in a care facility, that are not covered by health insurance or Medicare. Consult a financial planner or do research to find the right policy. Rates are lower for younger applicants.
• 5 Years to Go: Fully understand retirement income options. Get a current estimate of anticipated Social Security income. Check with your employer's human resources department to be sure you clearly understand your pension, if any. Review all investments, including pensions from former employers.
• 4 Years to Go: Pay off all debts, including credit card debt. Repay consumer debt, whether personal loans, educational loans or car loans.
• 3 Years to Go: Evaluate life insurance needs. Often, a large life insurance policy is no longer necessary for retirees who are not supporting dependents.
• 2 Years to Go: Plan your retirement lifestyle. Will you work part-time, travel or pursue a hobby? Create a retirement budget. Begin living on your anticipated post-retirement income. A good starting rule of thumb is 75 percent to 85 percent of current income. Save remaining income or use it to finish paying off debt.
• 1 Year to Go: Apply for Medicare. Recipients must sign up for Medicare as close to their 65th birthday as possible. The Social Security Administration recommends applying for Medicare three months before turning 65, as some benefits decrease if the coverage is not selected as early as possible.
These assigned years and action items are simply guidelines. Each task, however, is an important step along the road to retirement. By following this road map, you can plan for your own financial security, no matter what the future holds.
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