Retirement planning, just like the other areas of planning begins with a thorough self-assessment which will help you determine your course of action.

Setting Retirement Goals?. . . . .Where Am I Going?

First, you must ask yourself, "What will my financial needs be during retirement?" Some financial planners use as a target rule-of-thumb of 70% - 75% of pre-retirement income. This, of course, assumes that your financial needs will decrease in retirement. And, sometimes this is true. Expenses may be lower for example, for those who plan to pay off their existing mortgage and/or other debt obligations prior to retirement. Also, it is assumed that at retirement, costs relating to dependent children are gone.

These assumptions may or may not be applicable to your situation. Some planning candidates actually want to increase their income at retirement, so that they will have funds for travel, hobbies, etc. A review of your current budget, keeping in mind what changes (up or down) you think may be applicable to your situation, should give you a good idea of your financial needs (in today’s dollars).

. . . .When Am I Going To Get There?

The next question should be, "When do I plan to retire?" Your answer may be at age 59 ½ (the earliest normal date that qualified retirement funds, IRAs, etc. can be withdrawn without penalty); or it may be at age 65 (frequently considered the "standard" retirement age); or something earlier or later. One important point to keep in mind, the earlier you plan to retire, the more ambitious your accumulation program must be now!

Where Am I Now?.

Once you have determined your financial needs in today’s dollars and your target retirement date, you are ready to calculate the amount of "future" dollars you will need to accumulate in order to retire.

Try this Retirement Worksheet for your calculations.

One of the steps in completing the Worksheet is to determine what available sources you have at present to contribute to the funding of this goal. These resources may be in form of a future income stream (Social Security or a pension benefit from your employer) or in the form of accumulations such as savings accounts or other personal investments. These amounts are also converted to "future values" and applied against your needs. The remaining balance or shortfall is the amount you will need to save between now and your desired retirement date.

An additional Future Value Calculation will help you identify how much you will need to save at a particular investment return in order to achieve your goal. (In this case, the calculation uses Future Value of an Annuity.)

How Am I Going To Get There?

You may be having a difficult time trying to grasp the concept of future dollars. You are not alone. Many people have a difficult time understanding future impact; both in terms of how inflation will affect your future needs; and how the compounding of interest over long periods of time can help you to accomplish a financial goal.

Inflation is the rate at which the general level of prices of goods and services is increasing. Even projecting a meager level of 3% per year, if you are planning on retiring in 20 years; and you have estimated your needs in today’s dollars at $50,000, this means that by retirement, that inflation-adjusted need will be $90,000! Taking this a step further, twenty years into your retirement that $90,000 will have become $160,000! This inflation factor must be taken into account in all or your planning efforts, or you will find your resources seriously lacking.

On your side, however, is the power of the compounding of interest. To give you a rule of thumb, which does not require a complicated financial calculation, the Rule of 72 can provide a quick way to estimate the future value of your present assets. This method tells you how long it will take for a sum to double in value at various compound rates. You simply divide the number "72" by the applicable interest rate (rounded to the nearest whole number). The result is the number of years it will take your original sum to double.

Can I Get There From Here?

Sadly, many planning candidates -- upon consideration of the amount of savings necessary to provide their retirement goal -- discover that "they can’t get there from here." If the savings and/or investment return goal is beyond your reasonable capabilities, several options exist.

• You may need to re-evaluate your income needs in retirement, and make an appropriate reduction. This, of course, results in a lowering of future living standards. OR
• You may need to adjust your current standards of living downward in order to free up additional dollars, which can then be committed to your savings program, thus increasing your accumulation potential. OR
• You may need to adjust your time horizon to reflect a later date of retirement than originally planned. OR
• You may re-assess and re-allocate your current retirement investments in order to increase the return available to you, while could improve your ultimate funding balance.

At any rate, this whole process must be updated and verified periodically as you proceed toward retirement in order to make sure that there have been no material changes in your planning assumptions.

What Are The Most Common Roadblocks to a Successful Retirement?

Some of the most common roadblocks to financial success are:

• The tendency to spend all that we make without making any dollars available for saving
• Prioritization of other savings goals above retirement (Even if you are saving, you may be savings funds first as a down payment on a new home; for the college education of your children, etc.)
• Unexpected expenses, such as medical; major home repairs; etc. (Some of these issues can be dealt with through appropriate Risk Management strategies; others cannot.)
• Disruption of family status through divorce, death, etc. (Again, an adequate Risk Management program can anticipate and prevent loss for some of these circumstances; but no all).
• Repeated changes of employment (These changes can prevent you from becoming vested; that is, having the right to complete access to your benefits if you should leave your employment.)
• PROCRASTINATION Always having a "good reason" not to begin your savings plan ("I’m afraid of the stock market right now"; "I can’t afford to start participating in the retirement plan until I get my credit cards paid off", etc.)

What Are My Potential Sources of Retirement Income?

Sources of income for retirement are often compared to a three-legged stool. Each of the legs helps to hold up or support your retirement funding. These three legs are Social Security, employer sponsored pension and retirement plan(s), and your personal savings. Now, for a closer look at each of these:

"Social Security" is the Old-Age Survivor’s Disability and Health Insurance (OASDI) program of the federal government. Click here for a link to the Social Security Administration. (Be sure to visit the "top Ten" list on their site.)

Most working American citizens are eligible for benefits under the retirement portion of OASDI. Eligibility is based on accumulating a certain number of quarters of coverage during your working history. Many workers currently in their 30’s and 40’s are somewhat skeptical as to whether Social Security benefits will even be available as a source of funding when they retire. You may or may not wish to include this source of income in making your retirement calculations.

When Can I Receive Benefits?

Workers who are "fully insured" and have reached age 65 (age will be higher for those turning 65 after year 2000) may receive full benefits. Reduced benefits may be taken as early as age 62. (This will also be increasing in future years.) Also, if the retiree has a spouse who is 65 or older, this spouse may also be entitled to benefits of one-half of the amount received by the worker; with a reduced amount also available at age 62. (This will also be increasing in future years.)

Benefits are calculated by a complicated formula, based on your compensation history. Personal Earnings and Benefit Estimate Statements are available from The Social Security Administration by calling 1-800-537-7005. It is important to be aware of your accruing benefits for several reasons. First, this estimate will be needed in your Retirement Planning Calculations. Secondly, the Statute of limitations for correcting a Social Security earnings record is 3 years, 3 months and 15 days after the year in which wages were paid of self-employment income was earned. So, if any of your earnings history has been missed or improperly credited, this may affect your future benefits calculation and should be corrected immediately. Will I Be Able to Get Benefits If I Am Still Working?

Benefits are reduced for recipients under age 70 with earned income exceeding the following guidelines:

Also, there is no reduction in benefits for investment earnings that you may receive.

Will My Social Security Benefits be taxed?

Social Security Benefits are taxable if your annual income exceeds $25,000 for single taxpayers or $32,000 for married taxpayers filing jointly; and zero for married taxpayers filing separately.

Try this mini-quiz on SocialSecurity

In recent years, employer-sponsored plans (especially those that are totally funded by the employer) have diminished, partly due to the rapidly rising cost of employee benefits and partly due to the ever-increasing and changing reporting and plan requirements imposed by the federal government.

If your employer is currently sponsoring a retirement plan, it is important to be aware of what your benefits will be, and how they are structured. Again, this information will be needed to accurately complete your Retirement Planning Calculations (above).

There are two basic types of Qualified Retirement Plans, which may be offered by your employer.

• Defined Benefit
• Defined Contribution

A Defined Benefit Plan specifies the amount of benefit which you will receive at retirement It may be stated as a specific dollar amount (i.e. $700 monthly, beginning at age 65); or it may be stated as a percentage or number of units based on your length of service, salary, and other criteria (i.e. 50% of your average monthly salary during the last three years of employment). If you are a participant in this type of plan, it makes your retirement calculations easier, since you know with some certainty what benefit you will be receiving from your plan.

A Defined Contribution Plan specifies the amount of contribution that will be made over the accumulation period. But the amount of benefit that will be available is unknown, since it will be affected by time, the investment return and the amount of future contributions. For example, an employer’s plan may specify that it will contribute 3% of your annual salary each year to the plan on your behalf. But the amount available to you at your retirement will be based on when you retire, how well the plan’s investments have done over the years, and your actual earnings history which establish the 3% contribution.

Both of these plans are considered "Qualified Plans" under Federal Tax Laws. As such they provide several benefits to encourage participation. The first is that any contributions made to the plan are considered tax-deductible to your employer, and not considered taxable income for you... The second, and most important, is that all of the growth within this Qualified Plan will be tax-deferred until such time as you withdraw the money for retirement use. Of course at that time, all withdrawals (both principal and interest) will be fully taxed as ordinary income.

Since these deposits are meant for retirement use only, there is also a penalty (10%) for withdrawing these funds prior to age 59 ½ (except under special circumstances); and there is also a requirement that systematic withdrawal must start no later than 70 ½.

Generally, both of these Qualified Plans are completely funded by your employer. However, the trend in recent years has been to replace or supplement these traditional types of pension plans with plans in which the employees share in the cost. The most common of these plans is the 401k plan.

401k Plans are a form of Profit Sharing (Defined Contribution Plan). Both the employer and the employees can make contributions to this plan on a pre-tax basis, as with the other Qualified Plans. Also, as with the other Qualified Plans, all investment growth is tax-deferred until retirement. 401k plans are the most popular and fastest growing retirement plans, and chances are if your employer is currently sponsoring a plan, it is probably a 401k.

In most 401k plans, you generally have an opportunity to contribute up to 15% of your salary (pre-tax). There is usually a matching contribution by your employer (such as $.50 for each $1.00 you contribute up to a certain percentage of your salary.) The plan usually offers several investment options from which to choose where your money is invested. You also receive periodic statements advising you of your investment accumulation.

In addition to these plans, there are also numerous other versions of the Qualified Plan that may be sponsored by your employer. These include Straight Profit Sharing Plans, Simple Plans, and Target Benefit Plans. All of these plans work similarly to the other Qualified Plans and may or may not allow employee contributions. There may also be other plans such as Stock Options or payroll deduction savings plans.

Any and all plans offered by your employer should be carefully considered. Any plan in which your employer will be matching your contribution is usually the first place you should consider making a retirement investment. Consider this example:

If you are self-employed, you also have available to you similar plans known as Keough Plans. These plans also have tax-favored status, with the contributions being tax-deductible, and the investment gain being tax-deferred until retirement.

In addition to these Tax Qualified Plans, your employer may also offer certain "Non-Qualified" retirement plans. (This means that contributions to the plan will not receive a current tax deduction; nor will the investment earnings on the deposits made to this plan be tax deferred until retirement.) These plans include stock ownership plans; payroll savings plans and supplemental retirement accounts.

The third leg of our retirement "stool" is individual savings accumulations.

There are various ways that this can be accomplished.

One of the most common individual retirement savings vehicles is the Individual Retirement Account (IRA). IRAs are retirement savings plans available to any working American.

Traditional IRAs

• Contributions may be made up to $2,000, as long as this represents earned income (In other words, someone only earning $1200 in a calendar year could only contribute $1200.)
• Non-working spouses may also contribute $2,000 per year, assuming the working spouse has sufficient earned income for both IRAs (i.e. at least $4,000 in earned income, if both are contributing $2,000).
• These contributions are fully tax-deductible if the contributor is not an "active" participant in an employer-sponsored Qualified Retirement Plan. If the contributor does participate in an employer-sponsored retirement plan, then the deductibility is limited by income.
• All earnings grow tax-deferred until withdrawn at retirement, at which time they are fully taxable as ordinary income. If the original contribution was tax-deductible, it, as well as the earnings, will be taxable upon withdrawal. If the original contribution was not tax deductible, then only the interest will be taxable upon withdrawal.
• IRAs are subject to the same withdrawal restrictions as employer-sponsored Qualified Plans.
• There are certain prohibited transactions related to IRAs:

• IRAs may not include life insurance contracts.
• IRA assets may not be borrowed, or used as collateral for a loan.
• Certain investments such as art, antiques, precious metals (except a few specified coins), gemstones, stamps are prohibited holdings within an IRA.

Roth IRAs

• Instead of a Traditional IRA, you may elect to contribute to a Roth IRA. (You may even contribute to both a Traditional and a Roth IRA, so long as total contributions do not exceed a total annual contribution of $2,000.)
• Roth IRAs are subject to annual income limits of $160,000 for marrieds, filing jointly and $110,000 for singles (for 1999).
• Unlike Traditional IRAs, Roths are not currently tax-deductible, regardless of income.
• All investment growth within the Roth is tax-deferred until retirement; and if funds are ultimately withdrawn under prescribed criteria, there will not be any income tax due upon withdrawal.
• Roths are also subject to the same investment prohibitions as Traditional IRAs and the same 10% premature withdrawal penalty prior to age 59 ½, except under special defined circumstances.
• There are a few distinct differences between the Traditional and the Roth IRA.

• Contributions to a Roth may be made even after reaching age 70 ½, as long as there is earned income.
• Roths are not subject to the mandatory distribution requirement during the life of the owner which forces withdrawals to begin no later than age 70 ½.

Which of these IRAs will be best suited for your retirement accumulation depends on your personal situation. Consideration must be given to your current tax-bracket; your anticipated tax-bracket at retirement; the length of time until you retire, as well as other factors which are unique to your situation. Your tax and investment advisers will be able to provide guidance in the selection of the most appropriate plan for your needs.

There are numerous ways to save for retirement, in addition to IRAs.
Another commonly used vehicle is the Deferred Annuity.

Annuities may be:

• Single Premium or by installment payment (usually monthly)
• Fixed or Variable in investment nature (fixed guaranteeing the return of principal and a flat rate minimum rate of interest; with variable, like variable life, offering the investor the opportunity to select investments from among a number of investment options.)

An annuity is like other tax-qualified savings vehicles, in that there is a 10% penalty if funds are withdrawn prior to age 59 ½. When you are ready to begin the withdrawal phase of an annuity, you will have several choices. These options parallel those that are usually available in the withdrawal phase of your employer’s Qualified Plan.

Most Qualified Retirement Plans offer a number of pay-out options upon retirement. One option may be a lump sum, representing your entire retirement account balance. When this option is selected, income taxes will be due in the year of receipt on the entire amount. Some retirees find this option attractive, if they are going to be in a very low tax bracket for that year, and their personal retirement goals require a large lump sum of available cash. (For instance, they might be planning to buy a sailboat and sail around the world!).

However, most retirees will not want to face the large tax burden of paying taxes on their entire account balance at one time. This may be avoided by "rolling" the funds into an Individual Retirement Account (IRA). This will maintain the tax-deferral until withdrawals are begun. This must be done within 60 days of the date the distribution is received.

You should also be aware that if this option is selected, the transfer can be handled as a Trustee-To-Trustee Transfer. (That is, the custodian of your retirement plan transfers the funds directly into your new IRA account, without your ever taking possession of the funds.) If handled in this manner, the 20% withholding tax mandated by federal law will be avoided.

As previously discussed, special rules apply to those retiring prior to age 59 ½. Generally, funds withdrawn from a Qualified Retirement Plan, IRA, or an annuity prior to age 59 ½ will be subject to a 10% penalty. A few special exceptions apply to this penalty, and if you intend to retire prior to 59 ½, these options should be discussed with your financial adviser.

In addition to the lump sum or rollover option, most plans offer one or more structured pay-outs, which offer income streams for life or for specific periods of time. It is very important to understand these options since the option you select may greatly affect your cash flow in retirement. And, in almost all cases, once you have selected and have begun to receive a payout under one of these options, you will not be allowed to change your option. Some of the most commonly offered payout streams are as follows:

• Straight Life Annuity Payment – payment stream is guaranteed over the lifetime of the annuitant, whether that is one month or 50 years. Even if the annuitant dies early in the payment stream, there is no residual benefit. This option provides the highest payout of all the annuitized options.

• Guaranteed Minimum / Period –Certain Annuity – Annuity guarantees to pay for lifetime of the annuitant; but in addition, guarantees to pay for a certain period, even if the annuitant has pre-deceased.

• Annuity Certain – This annuity pays for on the period selected. It has no connection to the life span of the annuitant.

• Refund Annuity – This annuity guarantees payment for lifetime of the annuitant, and beyond that, guarantees payment until an amount at least as large as the purchase payment is reached. In essence, this creates a full "refund" of premium.

• Joint and Survivor Annuity – Payments under this option are based on the lives of more than just the annuitant; usually, it is the annuitant and a spouse. Payments will continue on a full or partial basis as long as either annuitant is living. This option is frequently used in pension plan to insure that surviving spouses will continue to receive all or part of the retirement income flow of his/her spouse.

As you can see, there is a difference between the payment levels of these various options. The more contingencies an insurance company is asked to accommodate the lower the income flow. For example, the simplest form of payout is the straight life annuity. The only contingency here is how long one person (the annuitant) will live. This option provides the highest payout of any life-contingent option. With the addition of an additional annuitant; a time period that is guaranteed; or especially if the company has to guarantee a full refund, the payment flows shrink accordingly. The ten year only option offered a higher payout, however, there would have been no benefits beyond the ten year period; and at age 65, Mrs. Brown (under normal circumstances) would have had a life expectancy considerably beyond this 10 year period .

If you will be selecting a retirement payout from among these options, your own personal circumstances will dictate which choice is best for you. But there is sometimes a way to "have your cake and eat it, too".

For example, if you are married and will need to provide an income stream for the life of both yourself and your spouse, but wish to take the highest payout possible, what are your options? In the example above with Mrs. Brown, if she took the Straight Life Annuity, her monthly income would be $690.78, but if she took, instead, the payout which would protect the income stream for the life of her spouse, as well, this would reduce her payout to $624.17 (a reduction of $66.61 per month).

One option worth considering is what is sometimes called "Pension Enhancement". This involves taking the higher Straight Life Pay-Out ($690.78 per month), and using a portion of that to purchase life insurance on Mrs. Brown in an amount necessary to create a monthly pay-out equal to what the survivor portion of the benefit would have been in the event the Survivorship Option were selected ($624.17 per month). In so doing, the higher benefit is maintained, but the same protection is provided for the spouse, in the event of an early death of Mrs. Brown. Whether or not this strategy would work in any individual situation depends on several factors to include age and health status of the retiree to be insured; difference in payment between the Straight Life pay-out and the Survivor Pay-Out. Your financial adviser can assist you in the assessment of these factors, as they relate to your personal situation.

How Are Distributions from Retirement Savings Taxed?

The tax treatment depends on how the distribution is paid; that is, as a lump sum distribution, an "annuitized" (structured and guaranteed) monthly payment; or as flexible withdrawals. Lump sum distributions are taxable as ordinary income in the year received. Partial withdrawals are also considered ordinary income in the year withdrawn. Periodic payments received from an Employer’s Pension or Retirement Plan are also considered ordinary income, as they are received. But annuity payments will betreated as part principal and part interest, with only the interest portion being taxable.

What Financial Issues Other Than Retirement Income Will Impact My Retirement Plans?

In addition to the fact that you will no longer be receiving a paycheck, there will be other financial issues you should anticipate in planning your retirement. One is the fact that benefits you have been accustomed to receiving from your employer at reduced or no cost, will probably no longer be available to you after retirement.

One of these benefits is your group life insurance. You will need to determine whether or not the need for this coverage still exists. If so, you may have the option to "convert" this coverage to an individual policy without being required to provide evidence of insurability. This is usually a very expensive option, and so, you may wish to price and apply for personal coverage several months in advance of your retirement to be sure it is in place by the time your group plan terminates.

Another important consideration is the continuation of your medical and dental insurance, since your group plan will generally terminate at retirement. In most cases, Medicare Coverage (Parts A and B) will be available to you, beginning at age 65.

• Medicare Part A covers hospital inpatient-related services
• Medicare Part B covers outpatient medical payments, such as physician fees; and a wide range of outpatient services.

Medicare, does, however, impose a deductible and co-insurance for most services, and does not provide coverage for other services; all of which may leave gaps in the medical coverage you wish to maintain. So you should consider the purchase of a Medicare Supplement ("MediGap") policy. These are offered through a number of private insurance companies and feature benefits ranging from very basic to comprehensive. Your decision as to the plan to be purchased will depend on your medical history; and the cost-effectiveness of desired benefits.

In summary, it is important to prepare for retirement by first establishing goals and time-horizons; then analyzing each of the three "legs" of your stool in relation to those goals; and then proceeding to enhance retirement savings through whatever vehicles are most appropriate to your individual situation.