Preparing for Retirement: Some Get It, Some Still Don't

Legislation passed in the last several years gave people saving for retirement the ability to put more money into IRA accounts and qualified retirement plans and reap significant tax benefits. Welcome news as Americans realize the serious need to take responsibility for their own retirement planning.

An estimated 28 million families headed by a worker under age 65 had no retirement savings accounts in 2001 ¹. And, while the actual dollar amount of IRA contributions increased after the new tax rules went into effect, it appears as if the actual number of taxpayers making contributions to an IRA is still declining, a trend dating back to 1997².

Despite the efforts of the government to help reverse this situation, two serious problems remain:

1. Americans aren't saving enough money to adequately fund their retirements.
2. The Social Security system will have increased demands placed on it as baby boomers age.

Are you saving enough for retirement in order to have the lifestyle you hope for? You don't want to be working at age 70 unless it's by choice. While some realize the importance of taking their retirement planning into their own hands, many continue to ignore the urgency of the matter. For those who need to set more money aside for retirement, there are many considerations to be made.

How and where to invest your money
With all the options available today, it's important to make sure your investments are as efficient and effective as possible. Are you in a tax bracket that makes tax-free investments more attractive? How do you get access to what you've saved without giving an unnecessary chunk of it to the government in taxes? Make sure you know all the tax implications of distributions from different types of assets especially if you are under age 59^1/2.

Your overall asset allocation
As a general rule, your money should be allocated among different types of investments and appropriate to your risk tolerance, time frame and investment objectives. The closer you are to needing the cash, the fewer fluctuations you will probably want in the value of your portfolio.

Because of varying degrees of gains or losses in each asset class, your asset allocation is destined to change over time. Rebalancing your account periodically can help smooth out the volatility and maintain the asset allocation needed to reach your planning objectives.

Set aside as much as you can afford
Here are several tax rules that may help you maximize the amount you put away for your retirement:

• Traditional and Roth IRAs - contribution limits (currently $4,000) increase to $5,000 in 2008 depending on your level of income.
• 401(k)s and Similar Plans - eligible deferrals increase from $14,000 in 2005 to $15,000 in 2006.
• SIMPLE IRA Plans - contribution limits of $10,000 as of 2005 ($12,000 if over 50).
• "Catch-up" Provisions for those over 50 - Generally, anyone over age 50 can make additional contributions to certain retirement programs over the usual limits:
  • IRA and Roth IRA - additional contributions of $500 are allowed through 2005 and $1,000 beginning in 2006.
  • Non-SIMPLE Pension Plans - additional contributions are allowed up to $5000 in 2006
  • SIMPLE Pension Plans - catch-ups are 50% of others
• Special Provisions for Business Owners
  • If you own a business, the recent tax law changes make it much easier for you to start a retirement plan that can provide meaningful benefits for you and attractive benefits for your employees.

Tips for Preparing
IRAs appear likely to be the largest source of non-Social Security income in retirement for many in the next generation of retirees (baby boomers and beyond). If you need to save more and have not been taking advantage of the higher contribution limits for these plans, don't wait any longer.

The key to living the lifestyle you want in your retirement is making the right decisions today. To that end, working with a respected and trusted financial professional can help you make those decisions that are right for you and your unique situation.

A Word of Caution
Don't plan on these provisions being around forever. The current rules 'sunset' in 2010 and will revert back to the (lower) levels of 2001; it will literally take an act of Congress to prevent it. The higher limits available today may help you improve your chances of living a comfortable retirement in the future. Take advantage of them while you can.

¹Journal of Pension Planning & Compliance 'Retirement Savings and Household Wealth: A Summary of Recent Data'
²Employee Benefit Research Institute Notes, August 2004, Vol. 25, No. 8 This decline may be due to the availability of Roth IRAs, which was not discernable at the time of printing.
³Employee Benefit Research Institute Issue Brief no. 232 'The Changing Face of Private Retirement Plans'(Employee Benefit Research Institute, April, 2001)



Robert Cox, MBA, Ph.D., ChFC is a Financial Representative with Northwestern Mutual Financial Network based in Clearwater, FL for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin.