Investing for Retirement

Basics of Saving for Retirement

Building a retirement nest egg is the number one goal of most investors and today, that means much more than just paying bills. Success at reaching this long-term goal can ensure a comfortable lifestyle free of money concerns, coverage for health care needs, and even knowing that you’re able to meet all your responsibilities and still endow family and charitable causes in the future. Whether you’re just starting a career or edging closer to retirement, you need a plan that helps you sock away as much as you can now to pay for your retirement years later.


Start Now and Focus on Saving for the Long Term

The earlier you get started, the more time your investments will have to grow. Invest regularly and establish an automatic investment plan that ensures that you keep saving no matter what.


Take Advantage of Every Opportunity

Be sure to participate in your employer-sponsored retirement plan where you work, if one is offered. Invest as much as you can and take advantage of any matching contributions from your employer. Be sure you also open an Individual Retirement Account (IRA) so you can put even more money away on a tax-deferred or tax-free basis.


Invest

Investing in mutual funds or investments that let you participate in the financial markets is important because they provide the potential for long-term growth. Mutual funds offer professional management and diversification, with many options to reach your goals. In addition, you can benefit from compound growth and tax-deferred investing.

How Much Will I Need?

One of the challenges of retirement planning is the difficulty in predicting the future. Factors like Social Security, corporate pension plans, inflation, food and housing costs, medical needs…all must all be taken into account and the unexpected must be accounted for.

As a first step, you need to estimate how much your retirement is likely to cost. You’ll need to determine how much income you’ll need, how much income you can expect from key sources…and how much more you’ll need to make up any shortfall.

Things to Consider

  • Annual expenses in retirement may range from 70%-90% of your current annual after-tax income.
  • Your mortgage may be paid off and you may move into a smaller home at retirement.
  • Expenses for your children, including college expenses may decrease.
  • Costs for health care, medical care and medications may rise.
  • Life insurance policies may be paid up; cash value policies may start paying money back to you.
  • Leisure and travel costs may increase.

Calculate What You'll Need

Use these simple calculators to determine how much you’ll need…and need to save to reach your retirement goal.

AARP.org

Smartmoney.com

Retirement Investment Accounts

You can invest in an Individual Retirement Account (IRA) or through an employer-sponsored retirement plan where you work. You can do both. However, there are different types of IRAs and retirement plans and each has certain rules and restrictions regarding contribution limits, income guidelines and withdrawals. Review the guidelines and specific details about these and determine which is the best option for you.


Individual Retirement Account (IRA)

If you are employed, you should take advantage of every option available to you to save for your retirement. One of the best ways is by participating in an employer-sponsored retirement plan where you work, such as a 401(k). But if you don't have such a plan...or even if you do and would like to invest more for retirement...you can contribute to an Individual Retirement Account, an IRA, to build a tax-deferred nest egg for the future. You must be sure to examine the guidelines to determine which IRA you should use.

As a special note, a child or minor who has earned income can also open an IRA. This minor IRA or Roth IRA must be opened and held by an adult in the name of the minor. The adult is authorized to perform transactions, but the minor is considered the registered owner of the account.


Employer-Sponsored Retirement Plans

Take advantage of your company’s retirement plan. These tax-deferred savings plans let you invest a portion of your earned income on a systematic basis.  Most employer-sponsored plans let you make contributions through payroll deduction, and some companies offer matching contributions. You usually have a choice of investment options to choose from and you benefit from tax-deferred growth until you begin withdrawals. Don't overlook the fact that you can fund an IRA and still participate in a retirement plan where you work.


401(k) Plan

This plan allows employees to contribute a portion of pre-tax dollars to a retirement account. While the specifics vary by employer, it can be structured as a "cash" or "deferred" profit sharing plan, or as a salary reduction plan. Either way, you benefit from contributions that reduce your taxable income and accumulate tax-free until withdrawal. Some employers even match your contributions.


403(k) Plan

If you are employed by a non-profit organization (hospital, church, school or charitable foundation), you are eligible to participate in a 403(b) if it is offered by your employer. Much like a 401(k), it offers a salary reduction plan, tax-deferred growth and possibly matching employer contributions.


Simplified Employee Pension Plan (SEP)

Often available in small businesses or by any employer or sole proprietor, a SEP offers tax benefits, with fewer administrative costs. Contributions are discretionary and can be as much as 25% of pay for each eligible employee.


Profit Sharing Plan

Some employers offer a profit sharing plan, which makes contributions that are discretionary, based on a company’s profits for any given year. Up to 25% of pay can be contributed each year.


Municipal Deferred Compensation Plan

Employees of certain state and local governments are eligible to participate in a Deferred Compensation Plan, to which they must contribute a percentage of their income.


Simplified Employee Pension Plan (SEP-IRA)

This plan is especially suited for the self-employed, unincorporated businesses or small corporations. It allows the employer to make contributions on your behalf to the plan. You can elect to receive the contributions in cash, but if you elect to have contributions made to the SEP, those contributions are excluded from gross income.


Simple Plan (Simple IRA)

This plan offers the simplicity of an SEP-IRA but is primarily funded with employee deferrals of up to 100 percent of compensation with an annual maximum amount allowed. This plan may be more attractive than an SEP-IRA because employer contributions are less, as the employee contributions primarily fund the plan.

Types of IRAs

Traditional IRA

The traditional IRA provides a way to grow your investments free of federal income taxes until money is withdrawn. If you qualify, you may be able to deduct all or part of your contributions on your tax return and reduce your current taxes…but only if certain conditions are met. Your deductible contributions are taxed when you make withdrawals, at a time when many investors may be in a lower tax bracket.

If you're eligible, you can contribute annually to your IRA and if you're married and file jointly, you can also contribute to your spouse's IRA. You can contribute to your Traditional IRA if you're under 70½ and have earned income. Even if you're over 70½, you may contribute to a non-working spouse's IRA if the spouse has not reached age 70½. If you're over the age of 50, you can contribute more than younger investors, through a "catch up" provision.

When you are ready to open an IRA, be sure to check out the eligibility guidelines for contribution limits and deductibility of your investment.


Roth IRA

A Roth IRA offers tax-free growth potential, but unlike a Traditional IRA, contributions to a Roth are not deductible from your current income tax. A Roth IRA may appeal to investors who believe they will be in a high tax bracket when they retire, since a Roth IRA may potentially reduce or eliminate taxes beneficiaries will have to pay after inheriting.

Roth IRA earnings may be withdrawn free from federal taxes under certain circumstances, if you abide by the rules.  The tax-free distribution feature is one of the main differences between a Roth and a Traditional IRA. With a Roth, up to $10,000 in earnings may be withdrawn tax-free if used for a qualified first-time home purchase. Once you reach age 59½, you may qualify for tax-free withdrawals of both Roth IRA contributions and any accumulated earnings. In addition, the Roth IRA owner is never required to take distributions, making a Roth IRA an effective option for both estate and retirement planning purposes.


Spousal IRA

The Spousal IRA allows spouses without earned income and spouses who do not earn enough income to fund an IRA fully, to qualify for an IRA. This feature is the only difference between this IRA and the Roth or Traditional IRA which both require earned income. Spousal IRAs can act as a supplement to other retirement programs.

Contributions can be made either to a Traditional or Roth IRA, and contribution limits are the same as Traditional and Roth IRAs.


Rollover IRA

If you change jobs and receive a distribution from your 401(k) or 403(b) or company retirement plan, you have to decide what to do with that lump sum within 60 days of the date you receive your money to ensure that you don’t incur heavy taxes and penalties. You’ll also want to invest those funds for continued growth. One of the simplest, most flexible options is to roll the distribution directly into an IRA.

(You cannot directly roll your retirement account into a Roth IRA. You can roll your account into a traditional IRA and then convert it to a Roth IRA.)


Direct Rollover into an IRA

When you leave a job, you can move your retirement savings from an employer plan into an IRA through direct rollover. Your employer would directly transfer your funds into an IRA or send you a check that is payable to the financial institution housing your IRA. There is no required withholding.


Indirect Rollover into an IRA

When you leave a job, you can have your employer send you a check for your proceeds from your employer-sponsored plan. However, the employer is legally required to withhold 20% for income tax purposes. Be sure that you know the restrictions and rules related to this option. Once you receive the proceeds, you have only 60 days to put the funds in a different qualified retirement account to avoid penalties.  If you fail to reinvest the distribution before 60 days, you pay a penalty, plus ordinary income tax on the distribution.


Education IRA

An Education IRA is designed specifically for funding higher education costs. Also referred to as a 529 Plan, these state-sponsored college savings plans allow you to make contributions into an account to pay those future costs. 529 Plans offer tax advantages to both the account owner and the beneficiary since no income taxes are paid on the earnings if the money is withdrawn for qualified educational expenses.

Contributions of up to $2,000 annually can be made for each child younger than 18. The non-deductible contributions won't be subject to a gift tax, and the accounts will be tax exempt.  Distributions that don't exceed amounts spent on education will be tax free, but all or part of the excess not spent on education may be subject to taxes and penalties. Consult with a tax advisor to determine if a 529 Plan is right for you.


Important Facts on Retirement Plans

Certain information related to retirement accounts and savings plans may change each calendar year.  For the latest information and the specific requirements, deductibility guidelines, tax advantages and benefits available to you, visit the IRS website. You should also consult your financial planner or tax advisor for help selecting the best options for you.

IRS Retirement Plan Information

Which IRA is Right for You?

IRAs IRA Comparison


For more details including current contribution limits, visit www.irs.gov and search for publication 590.

  Traditional IRA Roth IRA
Contribution Age Up to 70½ Any Age
Contribution Income Taxpayer has earned Income greater than contribution amount.
  • Taxpayer has earned Income greater than contribution amount.
  • Contributions are limited for high wage earners.
Tax Deductible Contributions Yes, but limited by taxpayer's income and workplace retirement plan. No. Contributions are made with after tax income.
Tax on Withdrawals Deductible contributions and earnings are taxed when withdrawn Contributions and earnings are never taxed
Required Distributions Minimum required distributions (RMD) must occur annually beginning in the year owner turns 70½. No withdrawal requirements
Withdrawal Penalties 10% penalty for withdrawals made by owners under 59½. Visit www.irs.gov for possible hardship exceptions.
  • Same as Traditional IRA.
  • Penalties may also apply for contributions made from a rollover, or Traditional IRA that do not meet the 5-year holding requirement.

Retirement Investment Portfolios

When you are ready to select investments for your portfolio, you’ll want to base those choices on many factors. When you begin investing is as important as when you plan to retire. The following sample investment portfolios are designed to illustrate how you might structure your investments as you build toward retirement. These are only samples and not intended as investment advice. As always, consult your financial advisor or tax advisor for the best approach to meet your unique situation.

Portfolios Retirement Investment Portfolios


These sample portfolios are designed to help you allocate investments throughout your life to reach your retirement goal. These are only examples to illustrate the approaches you might take in selecting investments for your portfolio. Each person’s situation is unique and should be reviewed regularly to take into account changes in lifestyle or life events, inheritances, or other major financial changes. A tax advisor or financial planner can help with strategies for wealth building, and later, with distribution and withdrawal processes.

Long Range Portfolio

Up to age 45

Start early, invest regularly and capture the benefits of time and compounding. You can seek higher return through more aggressive investments, but balance volatility according to your risk tolerance. If available, invest in an employer sponsored plan, with matching contributions.

Approaching Retirement Portfolio

Age 45-60

As retirement nears, reduce your overall portfolio risk. Balance aggressive investments with higher return with more conservative options for more
stable return.

Retirement Portfolio

Age 60+

You may not even retire for 10 more years, but preservation of wealth now becomes your primary goal. Balance for continued growth and to keep pace with inflation, but lower the overall volatility. Depending on your situation and financial resources, medical needs and other factors, you will need to adjust investments to ensure protection of principal and to meet income needs.