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With the discussion in the media of the problems of Social Security, it has made several people curious about retirement issues. Jeff Romine, Investment Advisor Representative and Partner in the Financial Planners of Missouri, stopped by the Good Morning Heartland set to talk more about saving for your retirement. 

Question: Should a young person be thinking about retirement issues?

Answer: Yes, absolutely!  Everyone should consider what their financial fate in retirement will be.  The news reports indicate that many individuals nearing retirement have not prepared well for their retirement. For a number of reasons: people are living longer; questions about Social Security’s future, fewer pensions from work -there is an increased need for individuals to shoulder the responsibility of planning for their own retirement. 

Question: How can one know what they will need in their retirement years?

Answer: It’s hard to know, but you must try to estimate the cost of your future lifestyle after you have retired.  Your retirement income must be enough to cover that lifestyle, or you will have to either continue to work or adjust your lifestyle.  Basically there are two approaches to determining what you will need in retirement.  One, the most common is to describe your desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60% to 90% of your income immediately prior to retirement.  Or it could be more. This approach is appealing because of its simplicity.  However, the problem is that it doesn't account for your specific situation.

The second approach is to estimate your annual retirement expenses by using your current expenses as a starting point.  If retirement is many years away, you need to remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.6 percent. Keep in mind that your expenses may change dramatically by the time you retire.  Expenses may start or stop, such as a mortgage may stop or a need to buy health insurances may start. And you must consider “big ticket” purchases like cars, home repairs, and trips. 

Question: How do you know how much to save?

Answer: Everyone’s answer would be different.  Once you have estimated the cost of your lifestyle in retirement, you need to consider your income sources: What will you receive from (1) your retirement at work, if any, or (2) Social Security, if anything?  If those two sources don’t provide enough income you will have to make it up with income from either your retirement savings or from other savings and investments.  I would suggest that you should try to save somewhere around 15% of your income each year. 

Question: What would you want to consider in making your estimate of one’s nest egg?

Answer: By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap between your needs and your income from pensions and social security.  It is hard to know if you have enough.  The following questions may help you find the answer:

• At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.
• What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.
• What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.
• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

Question: What would you suggest as a strategy?

Answer: Well first, your strategy should not depend upon you winning the lottery. And, your strategy should not depend on working forever.  I suggest three simple steps: save, save, save!  This is easier to say than to accomplish.  Most importantly, be aware of your situation.  Here are some common rules of thumb to build a retirement fund. 

1. Be aware of your employer’s sponsored retirement plan, if one exists.  Be sure to contribute enough to attain the employer’s match, if any. The match is “free money” and your contributions grow tax deferred until withdrawn.  This comes out of your paycheck before you see it, and may make it easier for you to save. 

You would want know if your employer sponsors income deferral plans; like a 401(k), 403(b), SIMPLE, or 457(b) plans).  These can be powerful savings tools. Your contributions come out of your salary before taxes and any investment earnings are tax deferred until withdrawn. Some employers will have a Roth feature in their 401(k) or 403(b) plans.  Although Roth contributions don't offer an immediate tax benefit, qualified distributions from your Roth account are tax free for federal taxes. While you are in a tax bracket that is lower than your anticipated retirement tax bracket, you want to determine if a Roth contribution is available.

1. Contribute to a Roth and/or traditional IRA.

IRAs often have additional investment options available.  The dollars in a traditional IRA will grow tax deferred until withdrawn.  The dollars in a Roth IRA will be tax free when withdrawn.  Most individuals can contribute up to $5,000 for 2012, and $6,000 if your 50 and older, years of age. There is a penalty for early withdrawals of the traditional IRA or earnings from the Roth IRA, which is before 591/2.  You would want to become knowledgeable about the other features of IRAs.

1. Any other investments or savings can also help you in retirement.  This might include such items as annuities, life insurance, or investments in stocks, bonds, or savings.

If you are a business owner, you have a few more options due to your business. 

If you work for the federal government, a state government, a railroad, or if you are in the military, your retirement benefits may be subject to special rules which you would want to become knowledgeable about. 

Question: How does one get started?

Answer: You should start planning immediately.  Too many people reach retirement age with too little saved.  A plan can help focus your efforts and resources. This plan could be either formal or informal.  We suggest having it on paper so that a married couple can discuss it, and then come back to it in a year to make revisions. 

Basically, you are balancing (1) living and spending in the current period with (2) the need to be able to live and spend in your retirement years.  Your plan is unique to you and your family and should be tailored to your unique set of circumstances.  It should include all of your current and future assets and debts, all of your future income sources, and all of your anticipated expenses for the rest of your life, including the costs for your children and any hobbies, travel, special dreams, or goals that you have. 

The earlier you get started the better off you will be.

Jeff Romine, Ph.D., CPA, Investment Advisor Representative
Financial Planners of Missouri
110 S. Franklin
Kirksville, Mo. 63501
(660) 956-9416
www.financialplannersofmissouri.com