Active Retirements » Retirement Plan

Retirement Investors Will Rule The Roost in 2009

Active Retirements Team — Sat, 24 Jan 2009 23:36:01 +0000

If what does not kill you does makes you stronger, and retirement investors will rule the roost in 2009.

While the financial world crashed and burned in 2008, there is a moment to pause and ask: “Ok, but how can we do?”

Now, you as consumers take a break, pop the cork and opening in 2009, is a good opportunity to reflect on how these costs are learned.

By Dana Dratch • Bankrate.com

Top things to know

Active Retirements Team — Sat, 24 Jan 2009 01:52:28 +0000

1. Save as much as you can as early as you can.

Though it’s never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year’s – that’s the power of compounding, and the best way to accumulate wealth.

2. Set realistic goals.

Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.

3. A 401(k) is one of the easiest and best ways to save for retirement.

Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and – usually – a matching contribution from your company.

4. An IRA also can give your savings a tax-advantaged boost.

Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn’t allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals.

5. Focus on your asset allocation more than on individual picks.

How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.

6. Stocks are best for long-term growth.

Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.

7. Don’t move too heavily into bonds, even in retirement.

Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation easily can erode the purchasing power of bonds’ interest payments.

8. Making tax-efficient withdrawals can stretch the life of your nest egg.

Once you’re retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.

9. Working part-time in retirement can help in more ways than one.

Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw annually once you retire.

10. There are other creative ways to get more mileage out of retirement assets.

For instance, you might consider relocating to an area with lower living expenses, or transforming the equity in your home into income by taking out a reverse mortgage.

5 New Investing Rules for Retirement

Active Retirements Team — Fri, 23 Jan 2009 11:36:53 +0000

Many of the old rules for retirement investing no longer apply. Facing longer life spans, increasing healthcare costs, and a market in crisis, retirees will need more growth in their portfolios during the coming years and decades. At the same time, they need the assurance that a 37 percent market drop–as we saw in 2008–won’t completely devastate their remaining nest egg.

A growing number of financial planners are rethinking the conventional wisdom. (Remember the old adage that you should subtract your age from 100, and devote that percentage of your portfolio to stocks?) Here are five new rules to consider:

Separate your investments into different pots. Often, investors in retirement lump all of their money together, with which they pursue one strategy, says Eric Bailey, managing principal of Captrust Advisers in Tampa. His firm, which works with pensions, endowments, and high net-worth individuals, takes an approach ripped straight from the institutional investors’ playbook. Clients’ money is separated into three categories: Short-term funds reside in very low-risk investments, such as high-quality bonds; intermediate-term money goes in a balanced mix of stocks and bonds–such as a 50-50 or 60-40 split; and long-term investments starting with five-year time horizons are heavier on stocks. “This way, you can take advantage of a market sell-off with your long-term investments and you’ll avoid needing to liquidate investments when stocks are down,” Bailey says.

Don’t reach too far for yield. Cash may be king in this market, but decent yields are hard to find. Treasuries present the ultimate in safety, but the pay is meager: The one-year bill currently yields just 1.1 percent and the five-year 2.2 percent. Unfortunately, if you’re looking for a bigger payout, you’ll have to take on some risk. Says Oliver Tutt, managing director of Newport, R.I.-based Randall Financial Group: “You’ll have to make a trade-off somewhere, particularly if you’re dealing with large amounts of money.” Stick with quality: If you’re considering a bond fund, for example, be sure to look under the hood at its various holdings and review the fund’s prospectus to see what types of bonds–and credit ratings–it targets. “Quality is always important, but more than ever it is now,” says Bill Walsh, chief executive officer of Hennion & Walsh, an asset management firm based in Parsippany, N.J. “Know what you’re buying.”

Make it a muni. Government bonds are airtight when it comes to safety, but their yields are near all-time lows. As an alternative for retired investors in the upper tax brackets, municipal bonds are worth considering. With munis, investors get the benefit of tax-free income, less volatility than corporate bonds, and, theoretically, more safety. “Right now, there’s more value in munis than almost every other area. But be sure you know the issuer,” says Walsh. Among munis, he recommends high-grade, general-obligation bonds and essential-purpose bonds such as the sewer authority. “Stay away from things like nursing home bonds, which could go out of business,” he says. Walsh prefers single-issue bonds over bond funds, which “will work, but you have to be careful,” because there is no set maturity date, no set yield, and managers can sometimes buy outside of that asset class.

Go for dividends. It’s a no-brainer that quality matters in a market like this. But how do you know if a stock is “quality”? Dividends are one indicator. That’s because dividend income–which is essentially a portion of company profits paid out to shareholders–helps offset fluctuations in a stock’s share price, creating a cushion during turbulent markets. “During trying times, dividend-paying stocks tend to do well,” says Paul Alan Davis, portfolio manager of the Schwab Dividend Equity Fund. Davis also looks for companies on solid footing, which have plenty of cash and aren’t in “financial straits.” During the first 11 months of year, Davis says, the S&P’s dividend-paying stocks fell by roughly 36 percent; meanwhile, nondividend payers were down about 45 percent. You’ll find those dividend payers in more developed industries such as consumer staples, utilities, and healthcare. Examples include Philip Morris, Coca-Cola, General Mills, Bristol-Myers Squibb, and Pfizer.

Consider “alternatives”: This asset class, which is used most often by pensions and other institutional investors, runs the spectrum from commodities and annuities to real estate. But individual investors can also use them to dramatically reduce volatility in their portfolios, says Gary Hager, founder and chief executive of Integrated Wealth Management in Edison, N.J. He likes real estate investment trusts, or REITs, which have historically provided a smooth ride for investors. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone, according to The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Other alternative investments to consider include commodities and inflation-protected securities, both of which are offered in ETF form.

Retirement Calculators

Active Retirements Team — Wed, 21 Jan 2009 15:33:23 +0000

A retirement calculator is one of the most useful things you can use when planning your retirement savings. You see most people plan for retirement without any idea of how much they need to save, or how much they want in retirement. A retirement calculator provides the answers.

A retirement calculator shows you how much to need to save to get the income you need when you retire. Or it may be how much you want! That depends how much you are making, and how young you are. Either way do use a retirement calculator.

You can find a retirement calculator on many web sites, so you do not need to get the services or a retirement planner or investment advisor to find the answers. In this way, you use the retirement calculator, calculate the amounts you need, and then visit an investment advisor or retirement planner.

To decide how much you need to save, you need:

1. The income you need to live on at today’s prices

2. The rate of inflation per annum between now and the retirement date.

3. The rate at which your fund will grow.

Let’s go through these and how they relate to a retirement calculator. First, how much do you need to live on? Remember, that retired people do not normally spend as much as people who work. When you retire, you won’t need:

special clothes for work the sort of car that keeps you up with the Joneses

you will be able to take holidays at off-peak times

and you will have time to do things – instead of paying to get them done.

So your costs will be lower. So let’s say you are earning $60,000 a year now, you might think that $50,000 would be enough. Next you need to remember that if you are healthy, you expect to live for 15-20 years, and so need to allow for inflation in that period – so actually you need more! This is where a good retirement calculator comes in.

2. The next thing the retirement calculator needs is the rate of inflation, or what you expect it to average until you retire. With the price of oil going up, we know that inflation over the next decade will be higher than it is now. Official figures put inflation at around 2-3%, but the true figure is more like 5%.

This means that you need to allow for at least 5%, and probably 7% and feed that into the retirement calculator.

4. At what rate will your retirement plan grow? A difficult one this. Five years ago, people were talking in terms of 10%, but not now experts suggest a lower figure. The problem is that a retirement fund or retirement plan has to be prudent – you don’t want to wake up one morning, a year or before you retire, to find that a crash on Wall Street has cut the value of your fund by 30%. You just won’t have the time to get that money back.

So you will be doing well to get 10% return, but could almost guarantee 5-6%. Maybe 7-8% would be a realistic figure to put into the retirement calculator.

The retirement calculator is just some software set up to make a calculation after you enter some figures. As I said earlier, the retirement calculator needs:

Required income

Inflation

Expected return

And of course, how long till you retire.

Here are some results from a retirement calculator:

Required income: $30,000 per annum

Years till retirement: 15 years

Annual inflation: 2.5% (unrealistic)

Annual yield: 5%

Income needed in 15 years: $43,448

Required value of retirement plan in 15 years: $825,000

Quite a lot of money for a modest retirement income. Here’s another one:

Required income: $30,000 per annum

Years till retirement: 20 years

Annual inflation: 5%

Annual yield: 8%

Required value of retirement plan in 20 years: $987,573

If you want an income of $45,000 when you retire – equivalent to less than $30,000 today – you will need: $148,000.

When you use a retirement calculator, make sure you use one that does calculate the income you will get at retirement adjusted for inflation – over 20 years, you will need 50% more than think you need today. If you do this, then you will benefit form using a retirement calculator.

About the Author:
Rex Truman is not retired but should be – instead he gives information at RetireWhenULike.com to help people save enough so they can enjoy retirement, ideally with an interesting job where they are in control.

Start Squirreling Away Funds For Your Retirement

Active Retirements Team — Wed, 21 Jan 2009 15:32:17 +0000

Investing for retirement is not something everyone does ahead of time. Many people do not get started because they feel that their retirement is several decades away and they can get to it in good time. Almost everyone under estimates the resources, mainly cash, that are required to retire with a certain quality of life. With better health management and medical technology, many people are beginning to live beyond the previous general estimates for human life spans. The result is that many people run the risk of running out of money before their time is up.

Since few people are motivated in investing for retirement early enough, it has become a serious issue for governments in many developed countries. In some of these countries their welfare systems are straining from the demands put on them by the growing numbers of elderly living beyond the estimates of previous human longevity models. In these countries governments have warned their citizens that their social security systems may not have enough funds to go around.

In order to face our retirements more confidently, it has become necessary for us to not rely on state-sponsored programs; but increasingly on self-managed initiatives.

Key Issues Regarding Investing For Retirement

Investing for retirement requires us to prepare a retirement plan early – the earlier the better. Unfortunately, when you are young it is very difficult to imagine life as a retiree. What can we do? Perhaps we should initially discuss it with our parents. Many of them would have experienced the positive and negative elements of investing for retirement. Next you may wish to a financial planner. Do not commit to any investments until you feel that you have done enough research, clarified your doubts, identified your key goals and estimated what portion of your salary you are prepared to save for the long-term.

During your discussions with your financial planner regarding investing for retirement, you are likely to be surprised how much you will need to set aside for the golden years when you would have stopped working. Many people tend to extrapolate their planned savings linearly and find that achieving their investment goals are near impossible. Your financial planner should be able to enlighten you regarding some essential concepts of investing like the time value of money, the effect of compounding interest, the benefits of a diversified portfolio with a spread among asset classes with varying risk and return profiles and pre-tax investment programs made possible by your employer or government.

When you have done sufficient research, understood key investment concepts and got sound advice from your financial planner, you will realize that if you start early enough and do the right things, you should be able to retire rather comfortably with sufficient funds to last your lifetime. Investing for retirement is not difficult if you start sufficiently early and act on sound financial planning advice.

The Advantages Of 401k Retirement Plans

A 401k retirement plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. Many people today are relying on 401k retirement plans to support their needs during their retirement. The funds from this retirement plan can be used to pay regular bills and in some cases if the funds are substantial, help us retire in style and luxury. In these uncertain times fraught with economic and political uncertainty and health scares, it pays to plan ahead for our future when we may not be economically very productive by saving with a 401k retirement plan. The 401k retirement plan is a flexible program that has substantial benefits for retirees.

Of all the advantages of a 401k retirement plan, they key advantage are the tax benefits. Companies you work for are responsible for creating and designing the plan. Some companies may restrict the amount set aside to match what the employer sets aside.

The tax benefit arises from the fact that you will only be taxed on the remaining amount of your salary after the savings into the 401k retirement plan. The return on investment from a 401k retirement plan may be higher than many other competing retirement investment plans. The flexibility advantage is that you may transfer the funds from the retirement fund initially setup with your former employer into the new employer’s 401k retirement plan. You may also choose to transfer the funds to a personal 401k retirement fund account.

Use Your 401k Funds To Build A Diversified Financial Portfolio

The 401k retirement fund plan is to a large extent a self-directed investment program. You can choose to assign the funds into a wide variety of financial assets like stocks, bonds, money market investments, mutual funds or some of them. You can choose to re-allocate the funds among these investment choices at any time. It is critical to get some information and advise regarding these financial instruments if you choose to invest and re-allocate the funds yourself.

Saving and investing with a 401k retirement plan is a great way to ensure that you have sufficient funds to live on long after your retirement from full-time employment. The funds can be withdrawn if they are needed in the event of an emergency. If necessary, you may also take out a loan against your 401k retirement funds. This should only be done after much careful thought and consideration. The funds in your 401k retirement plan are for your retirement. If you squander the money, you will just be postponing your agony into the future.

About the Author:

Cindy Heller is a professional writer. Visit Retirement Sentiments to learn more about saving for retirement and investing for retirement.

Employer-Based Retirement Plans

Active Retirements Team — Wed, 21 Jan 2009 15:20:24 +0000

Are you one of the lucky few whose employer provides a retirement plan? If yes, go ahead and embrace it wholeheartedly. Workplace retirement plans are one of the most effective means to save for the future. According to the Employee Benefits Research Institute, low-to-moderate income workers are 20 times more likely to save when covered by an employer-based retirement plan. Not only do you save, but you also benefit from the tax advantages.

There are two basic types of employer-based retirement plans – Defined benefit (DB) plans and Defined Contribution (DC) plans.

Defined Benefit (DB) plan

A Defined Benefit pension plan comes with an employer guarantee that you will receive a specific amount of money at retirement. The pension amount is related to the number of years you have worked at the organization and your highest earnings on the job. This amount is handed over at retirement in the form of a lump sum or monthly checks as long as you live. The Federal Government protects your DB pension benefits. Even if your employer goes bankrupt, you receive your benefits.

A DB plan begins paying your benefits when you reach retirement age and stop working. You can decide whether the plan covers you alone, or you and your spouse. If it’s the latter, your spouse receives the checks after your death.

The problem with a DB plan is that the employer alone contributes to the pension. Several companies struggle and end up with underfunded DB pension plans. When they go bankrupt, the Pension Benefit Guarantee Corporation (PBGC) takes over and pays out substantially reduced amounts to the pensioners.

Defined Contribution (DC) plan

To lessen their burden, a number of employers have shifted to the Defined Contribution plan in recent years. Here the employees take a more active role in managing their retirement income. They are responsible for investing the money during their working years.

A Defined Contribution plan comes with some risks that one needs to be aware of. It does not promise any returns, unlike a Defined Benefit plan. While the Federal Government does not guarantee the amount accumulated in your account, it protects the account assets from misuse. The total sum in your account depends on the amount invested over the years, the investment vehicles chosen and performance of those investments. Since the responsibility of retirement planning is shifted onto your shoulders, it is critical that you contribute regularly once eligible and that you choose your investments wisely.

The 401(k) plan is one of the popular types of DC plan. It is a payroll deduction plan that lets you save part of your salary for retirement. In some cases, the employer contributes to the 401(k) plan, with contributions ranging from 25% to 100% of your savings. There is usually an upper limit to the employer’s contribution into their employees’ 401(k). Occasionally employers put in company stock in lieu of cash. A plan with overloaded stock should be avoided. In the case of Enron, the company matched employees’ savings with company stock. When the company went under, the value of the employees’ retirement accounts plummeted because the Enron stock price nosedived.

Types of Defined Contribution Plans

401(k) plan – This is one of the most popular DC plans. It is usually offered by large organizations. The employer often matches the employee contribution.

403(b) Tax Sheltered Annuity plan – It is like a 401(k) but is eligible for employees of schools, churches, hospitals and certain non-profit organizations.

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) – Businesses with 100 or fewer employees can establish SIMPLE plans, where employees allocate part of their salary into an Individual Retirement Account (IRA) and the employer matches the contribution. The employees decide on the investment options.

Simplified Employee Pension (SEP) plan – This is designed for small businesses, that do not have other pension plans, and the self-employed. SEPs are tax-deferred retirement accounts.

Profit sharing plan – Company profits are shared with the employees, based on their salaries.

Employee Stock Ownership plan (ESOP) – It is similar to the profit-sharing plan except that it invests primarily in company stock. Employees share in the company ownership.

Tax Incentives

Although you, as an employee, are responsible for funding a DC plan, there are some tax breaks that make it very attractive. The money that you invest in the plan and the earnings from the DC plan are both eligible for tax deferment. This means that you do not pay income tax on the amount till you withdraw at, and hopefully not before, retirement. How does a tax deferment help? Postponing taxes means that the amount you invested in the plan and the earnings from it makes the nest egg grow faster. Add the power of compounding and the amount is substantially high. The larger the base amount available, a compound rate of interest balloons the total amount to significant proportions. A tax deduction upfront would have reduced the size of the base amount itself and consequently the final amount in the DC plan. Even though the withdrawals are taxed, the larger size of the nest egg, because of tax deferment, more than makes up for the taxes paid.

Let us say you wish to contribute $100 to your DC plan, and you fall in the 15% tax bracket. If you do not contribute to the DC plan, you pay a tax of $15 on the $100 that is part of your income. You get a net of $85 as take-home pay. On the other hand, if you do contribute $100, the entire amount goes into your DC plan and you postpone the taxes. In effect, your $100 contribution reduces your take-home pay by just $85 and not the entire $100. Meanwhile your nest egg, enhanced by your $100 contribution, grows faster and is only taxed when you withdraw.

Vesting

When an employer contributes to your DC plan, you do not have the right to withdraw the amount anytime it suits you. Until you spend a certain number of years at the company, you cannot access the money. Once you cross that period, the money becomes “vested”. You can withdraw it whenever you wish. This is called “cliff vesting”, which means that you are not entitled to the money until you complete a specified number of years at employment, but can withdraw after you do. A 401(k) plan vests after a 5-year period. No employer can force you to work longer than 7 years before you become vested in the pension benefits.

Some employers have a graduated vesting schedule. Here a certain percentage of your money gets vested each year you remain employed, until the amount is 100% vested. Some DC plans like the SIMPLE and SEP vest immediately. You can access the employer’s contribution the very day it is deposited.

Borrowings and early withdrawals

DC plans permit you to borrow money from the account, with a loan limited to half the vested amount in your account. In most cases, the loan needs to be repaid within 5 years. Borrowing can drastically reduce your nest egg, so try to avoid it.

If you wish to withdraw early from the account before retirement, you get levied a 10% penalty on the amount plus taxes. There are a few factors that allow you to avoid the penalty. Again an early withdrawal is highly avoidable.

In the event of a financial emergency, most DC plans allow you to withdraw money without incurring penalties. Unlike a loan, you do not have to repay the withdrawal. However there are a few stringent conditions to be fulfilled in order to qualify for an emergency.

Make the most of the DC plan by contributing the maximum amount possible, or as much as you can stretch yourself. Since an employer matches 25% to 100% of your contribution, the more you contribute, the faster your retirement fund grows. If you are over 50, you can put extra money in your retirement account in addition to regular contributions. Make informed investment decisions and you are well on your way to meeting your goals.

Original: http://www.advisorworld.com/2009/01/09/employer-based-retirement-plans/

Getting Started on Your Retirement Plan

Active Retirements Team — Wed, 21 Jan 2009 15:16:16 +0000

Plan your retirement now.

How do you see your retirement phase? Do you wish to retire early? Do you intend to travel a lot? You may have always wished to relocate after retirement. Are there any new hobbies you wish to take up? Is there a part-time job you would like to do for fun? Or do you plan to just relax and spend your days at a club in the country or with a fishing rod?

The answers to the above questions are important, as they will shape your retirement plan. Whatever you wish for, remember you need to provide adequately for retirement. For that, you have to start saving right away. If you plan to retire early, you need to save a lot more before the day arrives..

How does one go about drawing up a retirement plan? The first step is to consider retirement a priority in your plans for the future. This will help you do your homework and focus your efforts towards achieving your goals.

Setting your goals

Imagine what your retirement looks like – factor in money, work, lifestyle, health and housing and analyze each of the following questions:

How much retirement income do I need?
How much money do I need to pay off debts and bills?
Will I travel? How much money should I set aside for travel expenses?
Will my mortgage be paid off before retirement? If not, how will I meet my monthly payments?
What will be my living costs – here or in the place I wish to move to?
How much should I budget for medical expenses?

These will help you arrive at an approximate size of your nest egg and an idea of how much you need to save to build one. In fact, you should begin estimating your monthly savings from this point onwards. This step is very critical but most individuals lose interest and do not carry the planning to completion. The US Government’s MyMoney.gov site provides many tools to help you plan for retirement. Your financial planner is another person who can help you in this regard.

How much retirement income do I need?

Financial experts say that you need around 70% of your pre-retirement income to sustain your current lifestyle. However if you expect to have expenses related to travel, entertainment and other activities, you will need more.

Younger people in the early stages of their working careers may find it difficult to estimate their future income needs which is 30 years away. However it is imperative that they begin saving every month and review their retirement plan every 2-3 years.

Realities you cannot ignore.

Longevity – Our life expectancy is higher than what it was for our grandparents. People are living longer and they living for a lot more years beyond retirement than before. Based on current estimates, a retiring 55-year old male and 55-year old female can expect to live approximately 23 and 27 years in retirement. This means that the likelihood of living at least 20 years in retirement is pretty high. While general health and family history play their part, the trend of longer lives is expected to continue.

Inflation – Inflation can erode your savings like nothing else. While inflation has been low the last few years, there is no guarantee in which direction it will turn in the future. What looks like a sizeable retirement amount now can shrink considerably down the years due to inflation. As an example, with an inflation rate of 3%, if you retire comfortably at age 60 with an annual income of $40,000, by the time you hit 80, you will need $72,000 to sustain your standard of living.

Insurance – While you are working, you are probably insured through group policies covering for disability, health and life. Once you retire, you lose the coverage. If you and/or your spouse were to now suffer a major illness or disability, how will you pay for the hospitalization and medical expenses? You therefore need to plan for adequate insurance and savings for your retirement phase.

Social Security – The earliest you can start receiving Social Security benefits is age 62. At 62, you receive 80% of what you would have received at the “normal” retirement age. This age has gradually moved from 65 to 67 years. If you wait till age 70, your monthly benefits will be even higher. Deferring Social Security benefits for as long as possible can increase monthly benefits. However have you planned for other sources of income, in the absence of Social Security, to be able to live comfortably in retirement?

Take Action

Choosing when to retire and how to live thereafter is an individual decision. The best strategy is to do your homework, determine how much money you need to set aside to let you live the lifestyle you want, seek out professional advice when needed – and start now!