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Retirement Planning


To figure out how much you will need, try the Fidelity Retirement calculator or use the following worksheet: 
1. Annual Income you'd like at retirement in today's 
   dollars                                             $_________
2. Your age                                             _________
3. You estimated retirement age                         _________
4. Years to retirement(#3-#2)                           _________
5. Annual income after retirement(#1*1.03^#4)          $_________
6. Assuming 5% interest, how much of a nest egg you'll           
   need(#5/0.05)                                       $_________
With about 3% inflation currently, today's $1 is equal to $1.03 next year. So you'll need a lot more to retire in the future than today at the same living standard. Line 5 figures what annual income at retirement would equal what you want in today's dollars. Line 6 is how much you would need at your estimated retirement age, assuming at retirement, you put all your money into CDs that pay 5% a year. Now look at the chart under your age, look at 15% annual return, which is typical mutual fund performance, and see about how much you would need to save per month to reach that goal. If as you go along in your career, your retirement expectations rise, simply save and invest more accordingly.

One important option everyone should take advantage of is an Individual Retirement Account(IRA). Each year, you can put up to $2000 of your earned income into an IRA. All or part of that amount can by deducted from your income when you figure your taxes, depending on your annual income and whether you participate in an employer sponsored retirement plan. When your IRA money rises in value, you don't pay taxes on the gain until you start withdrawing after age fifty nine and half. You have to pay a penalty if you start withdraw before age fifty nine and half or after seventy and half.

Many companies offer 401(k) plans. You authorize you employer to deduct a certain amount form your check each pay period. Your employer match all or part of the amount you contributed. So you are getting money for nothing! So you should always maximize your contributions-contribute up to the limit. Also, up to $7000 of your annual contribution is tax-deductible. Your 401(k) account grows tax-deferred. Like an IRA, you only pay taxes after you start withdrawing. You and your employer together can contribute $30,000 or 25% of your annual income(after deducting the 401(k) contribution), whichever is less. But unlike an IRA, you can't invest your 401(k) account in anything you want. Usually the employer offer a family of mutual funds of different objectives, and you can choose to invest in one or more of the funds. In most cases you will have to pay a 10% tax penalty if you withdraw before age fifty nine and half. You may borrow from your 401(k) account the lesser of $50,000 or half of your account balance. But you must repay the loan within five years, unless it is used to buy a principal residence. The loan must carry a "reasonable" interest rate.

With employer-sponsored pension funds, your employer tuck away money and invest it for you. You are not taxed on that amount or the account's appreciation until you withdraw from the account. There are two types of pension funds. In a defined-contribution plan, you employer put away a specified amount each year. The pension you receive when you retire depends on how much was put away for you and how well that money had been invested. With a defined-benefit plan, you receive a specified amount each year after retirement, no matter how much had been put away or how well it was invested.

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