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Retirement Planning

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America's Aging population

Common Retirement Myths

It is an unfortunate fact that many Americans spend less time planning for their retirement than planning for their vacations. All it takes is intelligent planning and a clear understanding of the myths that hinder us from building a secure retirement.

Consider the following myths:

Myth #1: I'm too young to worry about retirement. You're never too young to make plans. The sooner you begin saving for retirement, the less you'll have to put aside. For example, if you want to have a $200,000 nest egg by age 65, with a 9% interest rate you'll only have to save about $26 a week if you start at age 35. But if you wait until you're 55 to start, you'd have to put aside $233 every week. This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.

Myth #2: I won't need much to live on. Many experts estimate that on average, to maintain your standard of living in retirement, you'll need 60 to 80 percent of your pre-retirement income. And that income has to continue to grow enough in an attempt to keep up with inflation.

Myth #3: My kids will take care of me. Most children want to lend their aging parents a hand, but many can't afford to. About the time you're ready to retire, they'll be paying their children's college tuition and saving for their own retirement. You'd be wise, therefore, to leave the kids out of your plans.

Myth #4: Social Security will take care of me. Although it's unwise to expect Social Security to cover all your costs, you can take steps to increase your benefits. Work as long as possible. You can start collecting Social Security at age 62, but your benefits may be reduced by 20 percent. If, on the other hand, you work until age 70 you'll receive even more.

Myth #5: I can't afford to put money away where I can't touch it for many years. The truth is, you can't afford not to participate in tax deferred retirement plans. Contributions to 401(k) and similar employer sponsored plans may reduce your current taxation. In addition, taxes are also deferred on earnings, so retirement savings have the potential to grow faster than others do. Best of all, many employers match all or part of your contributions to employer sponsored retirement plans, giving you money you would not otherwise have. The one drawback is that you may have to pay a 10-percent penalty, plus current income taxes, if you withdraw money out of a retirement plan before you're 59 ½.

What should you do? A comfortable retirement requires looking the facts squarely in the face - creating a realistic plan that works for you.

2003- Older workers working longer

The notion of America's retirees playing golf all day or lounging by the pool may become obsolete as 70% of older workers say they plan to work past the normal retirement age, a study by AARP said. The survey shows 7 in 10 Americans plan to work past the once-typical retirement age of 65 and nearly half expect to work well into their 70s and even 80s. The trend to postpone retirement is no longer unusual; but even AARP researchers said the intention to work another decade or more was a new phenomenon. "What did surprise us is that people intend to work way past the traditional retirement age," said Jeff Love, research director at AARP.

Interviews with 2,001 people aged between 50 and 70 showed that the main reason for working past retirement has more to do with financial need than fulfillment of professional goals, enjoyment or a desire to stay active. When forced to choose one main reason for staying employed, the majority, 22 percent of those near retirement and 35 percent of retirees, said it was to make money. Higher health care costs, insufficient retirement funds and recent investment losses feed the need to keep earning, AARP said. "I suspect it's because people have really taken a (economic) hit in the past two years," said Love.

Traditional company pension plans that promise a set payout based on years of employment are increasingly being replaced by plans dependent on individual contributions and investment choices. Newer retirement plans place the risk burden on the shoulders of employees, said Gary Burtless, who specializes on retirement policy at the Brookings Institution. Furthermore, he said, fewer companies are offering desirable health insurance for retirees, if at all.

AARP also reported that 61 percent of the respondents who plan to work past retirement age will continue their present job or work in a similar one. By 2006, nearly 46 percent of the U.S. population will be older than 44, said Jon Dauphine, director of the economic security and work program at AARP. Older workers are also projected to be a growing percentage of the workforce. People who are 55 and older will make up 17 percent of the workforce by 2010 up from the 13 percent in 2000, according to the Bureau of Labor Statistics.

Retirement Plan Types

For many employers, the question isn't whether or not to offer a retirement plan. Employers generally realize the value of having a plan. Such plans can save the company taxes, increase employee loyalty, satisfaction and productivity and provide a means to recruit and retain qualified employees as well as enhance retirement benefits.

The primary question is "What type of plan should we offer?" SEP, Profit Sharing, Age-Based Profit Sharing, IRA, 401(k), Defined Benefit, SIMPLE IRA; The choices are many, and each has its advantages and disadvantages for employers and employees alike. For many employees, there may be only a single type of plan offered or a choice. In some cases the employees may request a certain type of plan be offered. Retirement plans can save you taxes, in some cases provide a lender, insurance benefits, etc. Each type of plan has its advantages and disadvantages for employees

Non-Qualified Deferred Compensation (NQDC)

Non-Qualified Deferred Compensation (NQDC) can be a powerful retirement planning tool, particularly for owners of closely held corporations (for purposes of this article, I'm only going to refer to "C" corporations). NQDC plans are not qualified for two reasons; some of the income tax benefits afforded qualified retirement plans, and the employee protection provisions of the Employee Retirement Income Security Act (ERISA). What NQDC plans do offer is flexibility which is something qualified plans lack

Social Security

No discussion of retirement planning is complete without considering Social Security. Everybody paid into it and everybody expects to get something out of it. But what should you expect, what can you do to increase it, what shouldn't you do as it will reduce it.


Retirement Planning Articles

Many of us have heard the term "down-sizing". Down-sizing in corporations has taken it's toll on the American worker. Many people, ranging in age from their late 40s to early 60s, are faced with very difficult decisions. These middle-aged, middle managers are being asked to consider "early retirement." The offers from their employers may range from lucrative to paltry, but the decisions are difficult in almost every case. Let's review some of the factors to consider when evaluating one of these "offers you can't refuse."

Those who are about to retire or change jobs, or whose employer is terminating the company retirement plan, may be eligible to receive a "lump sum distribution" as defined in the Internal Revenue Code. Such a distribution may be substantial and may represent the cornerstone of their retirement security. So it is important for them to consider their options carefully before making a decision regarding distributions. Basically, they are faced with two main options. Should they take their distribution and pay taxes now? Should they roll their distribution over into a Rollover Individual Retirement Account (IRA)?

Qualified retirement plans and Individual Retirement Accounts (IRAs) are great vehicles to take advantage of tax-deferred growth and save for retirement. When an individual eventually decides to tap into his or her retirement fund, withdrawals from these plans are subject to regular income taxes. There's one catch, however, for people who are under 59 1/2 years old. They will pay an additional 10 percent tax for premature distributions, in addition to the regular income tax, unless they can fit within one of the exceptions to this penalty tax

Given recent events in the news, many employees have begun wondering what would happen to their 401(k) dollars if their company were to go into bankruptcy, out-of-business, or was merged or acquired by another firm. This is a question that few employees think about when making contributions to their company retirement plan. Yet, in the economic environment of today where corporate closings and restructuring are not uncommon, it makes sense to know what level of safety exists.

With the growth of employee-employer savings to meet retirement goals, it is not uncommon for employees to have a significant amount of employer stock in their qualified retirement plans. When it comes time for employees to leave the nest, most are willing to directly rollover all qualified plan assets into a Rollover IRA. A Rollover IRA offers avoidance of an immediate income tax consequence, the retiree remains in control of his/her retirement assets and the benefits of tax deferral can continue. However, there may be another option available that should be considered, a type of combination approach. This option involves distributing employer stock to the retiree and directly rolling over the remaining balance of the plan assets into a rollover IRA. This combination approach, though not for everyone, may have significant advantages. By not including the employer stock in the Rollover IRA, the retiree is exposed to income taxes immediately. This is because he/she is receiving the shares as a taxable distribution. However, the taxes due will be only on the cost basis of the stock

Consider the savings habits of this 20-year old couple. The wife starts putting $2,000 per year into a tax-deferred investment when she is 20. After 10 years, she decides to stop investing and just let her money grow until she retires. The husband decides to start investing when his wife stops. He invests $2,000 a year in a tax-deferred investment from the time he is 30 until he retires at age 65. If they both earn 8% on their savings, who will have more money at age 65? Time and compound interest favor the wife. She will have $462,648 at age 65, while her husband will only have $372,204.

If you own an Individual Retirement Account (IRA), the primary purpose is to accumulate assets to provide an income source during retirement. In the accumulation phase, you may contribute to an IRA on a tax deductible basis (with some exceptions) with the earnings growing tax deferred. Upon withdrawal, distributions will be included in income and taxed accordingly. In addition, for those wishing to access their IRAs "early", distributions prior to age 59 ½ will be subject to a 10% premature distribution penalty tax, unless an exception applies. You may have thought that there is no way to withdraw funds from your IRA "early", before age 59 ½, and avoid the 10% penalty. This is not true. The IRS permits an individual, under the age to 59 ½, to make distributions from their IRA and avoid the 10% early withdrawal penalty if the distributions are due to one of the IRS exceptions, one of which is a series of substantially equal periodic payments. As you may have guessed, there are several requirements that apply when claiming the substantially equal payment exception.

As IRA and other retirement plan account balances continue to grow larger, often into very significant amounts, the need to understand tax characteristics becomes more critical. These types of accounts offer the tremendous benefit of tax deferral, as everyone is well aware, but a "taxing" problem may remain upon the death of the participant. This quandary is known as income in respect of a decedent. Income in respect of a decedent is income to which the decedent was entitled, but due to his or her death was not includable in his or her taxable income. In other words, IRD assets do not receive a step-up in cost basis at death like capital assets. Therefore, they are taxable to the estate or the heir who receives them. For more on this Hidden Tax Opportunity For Tax-Deferred Investments click here If you fit into a certain category of IRA savers, you should check out this technique that can help your IRA last longer. If you do fit in, make sure the bank, insurer or fund company holding your IRA will let you use this technique; switch sponsors if it won't. Citibank is among the IRA sponsors that don't allow it. If you fall into this category, then you should, when setting up your IRA payout schedule, seriously consider choosing a "hybrid" life. That sounds like actuarial mumbo jumbo, and it is. But it could give your IRA years of additional life, and that could make your family thousands of dollars better off.

For many families, a significant portion of their wealth may be located within the couple's Individual Retirement Accounts (IRAs). Should the family unit break down, it is therefore important to have an equitable and easy method to divide and transfer assets. Division of retirement assets can be a sticky problem and left to the court system. Yet, once a decree of divorce or separate maintenance is entered, the transfer of IRA assets from one spouse to another should not add further difficulty. When an interest in an IRA is to be transferred from one spouse to another under a court decree, the Internal Revenue Service has attempted to facilitate as easy a transfer as possible. This accommodating position is most likely in response to the level of divorce in today's society. In general, the transferred interest in the IRA is viewed as the recipient-spouse's property and, therefore, this conveyance is acknowledged as tax-free. The IRS also offers two basic transfer methods to help during such a trying time

Retirement Tax Planning

Financial planning is really life planning. Choosing a home, particularly a retirement home, involves many factors. With state and local taxes on the rise, retirees should look closely at tax matters when formulating their retirement financial plan. What will you look for as you approach your "golden" years? Will it be an affordable condo on the golf course with room for the grandchildren to visit? Must it be close to friends and family or new "senior" friends living close by? Should it be near good medical facilities? The average householder 65 or above earns only two-fifths as much as earners age 45-54 (who are at their peak earning years). Even though many "golden agers" are now free from the encumbrances of children and work-related expenses, the costs of daily life must be planned. Income must be protected to assure its availability for household expenses and higher health care costs. The "golden agers" have even more than lifestyle questions to consider in choosing their retirement nest. You should take a look at the effect of state tax structures on your projected retirement income. It's important to look at the following key tax areas:

  • TAXATION OF EARNED AND INVESTMENT INCOME Retirees who plan on continuing to work in their "golden years" should know that state taxation of such income varies widely. Some states give retirees favored treatment on earned income, some treat retired seniors like everyone else, and some impose no tax at all on earned income. Taxation of investment income shows nearly as much variation between states. Retirees in a new domicile should also watch out for unexpected municipal income taxes.
  • PENSION INCOME TAXATION Income from government, military, private pension and other retirement plans is growing increasingly important to the survival of retired individuals. Some states exempt all such pension income from taxation, while others exempt certain types or place limits on non-taxable pension income. Some states even tax former residents on retirement plan withdrawals, creating the possibility of paying income tax in two states. Some states follow federal tax formulas for taxation of Social Security benefits, others have their own formulas, and some do not tax Social Security benefits at all.
  • TAXES ON SOCIAL SECURITY BENEFITS Social Security benefits are important to all seniors. Some states do not tax this benefit at all, some follow federal tax formulas for determining taxes on the benefits, but still other states have their own formulas to determine the tax due.
  • PROPERTY TAX Some states offer advantages to seniors such as homestead exemptions that can be helpful in reducing property tax burdens. Remember to check the tax laws regarding taxes on personal property, especially cars and boats.
  • SALES TAX RATES Nearly every state, and often localities within each state, tax clothing, gas, household goods and sometimes even food and drugs. When you budget your fixed income for these items, remember to consider the sales taxes as you move to your retirement nest. As an example; in Arizona, the Sun Cities have incorporated - not as cities - but as corporations and banned those younger than 55. As a result they pay the statewide portion of sales tax (currently 5%) but not a city sales tax (generally 2.5 - 3.5%) nor do they pay any State school taxes. Retirees should consider sales taxes when estimating their retirement budget for such items as clothing, household goods, food and drugs.
  • ESTATE TAXES Even though these taxes will not affect your cost of living as a senior, they should be considered as you build your nest. It is also important not to overlook the effect of estate taxes upon the surviving spouse. Some states tax the surviving spouse on a portion of the inheritance which in another state would pass to him or her without being taxed. States are studying how to make their financial environments friendlier to seniors so watch for changes in state estate tax codes. All retirees weigh the cost of living, weather, nearness to relatives and recreational opportunities in their decision to settle in their retirement community. The tax climate should also be examined to analyze the financial situation during retirement. Working with an experienced financial planner, as well as a tax advisor, is often recommended to those looking for a retirement home. The websites listed are being provided for information purposes only. Although we assume the information is factually accurate, we are not responsible for the content as we are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors. First Allied Securities, Inc. is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. First Allied Securities, Inc. is not responsible for the content of any website or the collection or use of information regarding website's users and/or members.

NOTE: ALL information contained in this site is for illustration purposes only, and by NO means should be considered individual tax or legal advice under any circumstances whatsoever! This site is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein. We suggest that you consult with your financial or tax advisor with regard to your individual situation.  © 2013 Advanced Corporate Planning All rights reserved