Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 20 years, retirees need to be concerned with maintaining their cost-of-living.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Medicare; however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plan today.
Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with settlement costs and sizable death taxes which could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.
Social Security was established in the 1930's as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives. The age of retirement, when the income benefit starts was, originally, age 65 which was referred to as the "normal retirement age". Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond. The amount paid in benefits is based upon the earnings of an individual while working. If a person wanted to continue to work and delay receiving benefits, they could do so build up a larger benefit. Conversely, early retirement benefits are available, at a reduced level, as early as age 62.
Employer-Sponsored Qualified Plans
Most employer-sponsored plans today are established as "defined contribution" plans whereby an employee contributes a percentage of his earnings into an account that will accumulate until retirement. As a qualified plan, the contributions are deductible from the employee's current income. The amount of income received at retirement is based on the total amount of contributions, the returns earned, and the employee's retirement time horizon. As in all qualified plans, withdrawals made prior to age 59 ½ may be subject to a penalty of 10% on top of ordinary taxes that are due.
Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan or, in the case of a non-profit organization, a 403(b) plan.
Individual Retirement Accounts (IRA)
Individual Retirement Accounts (IRA) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment. The traditional IRA allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account. Distributions from a traditional IRA are taxable. A Roth IRA is different in that the contributions are not tax deductible; however, the earnings growth is not currently taxable. Distributions from a Roth IRA may be tax free if certain conditions are met. Withdrawals made prior to age 59 ½ could result in a 10% penalty.
- Traditional IRAs provide a tax-deferred retirement savings plan that allows you to take advantage of interest growth over time until you are able to begin making withdrawals upon reaching age 59 ½.
- Anyone who is under the age of 70 ½ and has earned income equal to or greater than their IRA contribution may be eligible to have a Traditional IRA.
- An IRA holder may contribute 100% of earned income up to $5,000 (under the age of 50) and $6,000 (over the age of 50). Contributions may be tax-deductible
- Roth IRAs allow your savings to grow tax-free. Contribution amounts are NOT tax deferred and therefore can be withdrawn at any time.
- There is no age limit for eligibility for a Roth IRA but you do need an earned income equal to or greater than the IRA contribution.
- Earning may be withdrawn tax free once you are over the age of 59 ½ and your Roth IRA has been established for at least five years.
A ________ Bank Retirement Specialist can help you assess your retirement needs to determine whether a traditional IRA or Roth IRA would provide the best retirement savings solution.
For more information on retirement income needs and income sources, please contact us at _____________, or visit one of our branch locations.