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Retirement: Prepare, Plans, and Tips For Individuals

Retirement: Prepare, Plans, and Tips For Individuals

Retirement is defined as the period in a person’s life when they opt to leave their working life behind forever. Many people decide to leave their jobs when they are too elderly or sick to contribute any longer.

Early retirement is often considered at the age of 62, which is the earliest age at which a person can begin receiving Social Security retirement benefits. For those who choose to retire early, Social Security typically accounts for 40% of pre-retirement income.

When an individual reaches full retirement age, he or she is eligible to receive the maximum amount of Social Security payments, which is normally age 67. Social Security benefits, however, are lowered for those who choose to retire early.

10 Ways to Beat the Clock and Prepare for Retirement

Whats Your Plan for Retirement

Know Your Retirement Needs

Retirement is expensive. Experts estimate that you’ll need about 70% of your pre-retirement income-lower earners, 90% or more – to maintain your standard of living when you stop working. Understand your financial future.

Find Out About Your Social Security Benefits

Social Security pays the average retiree about 40% of pre-retirement earnings. Call the Social Security Administration at 1.800.772.1213 for a free Personal Earnings and Benefit Estimate Statement (PEBES).
Learn About Your Employer’s Pension or Profit Sharing Plan.

If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one. Before you change jobs, find out what will happen to your pension. Learn what benefits you may have from previous employment. Find out if you will be entitled to benefits from your spouse’s plan. For a free booklet on private pensions, call the U.S. Department of Labor at 1.866.444.3272.

Contribute to a Tax-Sheltered Savings Plan

If your employer offers a tax sheltered savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, deferral of taxes and compounding of interest make a big difference in the amount of money you will accumulate.

Ask Your Employer to Start a Plan

If your employer doesn’t offer a retirement plan, suggest that he/she start one. Simplified plans can be set up by certain employers. For information on simplified employee pensions, order Internal Revenue Service Publication 590 by calling 1.800.829.3676.

Put Money Into an Individual Retirement Account

You can put $2,000 a year into an Individual Retirement Account (IRA) and delay paying taxes on investment earnings until retirement age. If you don’t have a retirement plan (or are in a plan and earn less than a certain amount), you can also take a tax deduction for your IRA contributions. IRS Publication 590 contains information about IRAs.

Don’t Touch Your Savings

Don’t dip into your retirement savings. You’ll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or your new employer’s retirement plan.
Start Now, Set Goals, and Stick to Them.

Start early. The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement saving a high priority. Devise a plan, stick to it, and set goals for yourself. Remember, it’s never too late to start. Start saving now, whatever your age.

Consider Basic Investment Principles

How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you’ll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.

Ask Questions
These tips should point you in the right direction, but you’ll need more information. Talk to your employer, your bank, your union, or a financial advisor. Ask questions and make sure the answers make sense to you. Get practical advice and act now.

Facts

  • Financial security doesn’t just happen, it takes planning, and commitment, and yes, money.
  • Less than half of Americans have put aside money specifically for retirement.
  • You can’t retire with security unless you really prepare for it. That means facing up to reality, and beginning to take action for tomorrow as well as today.
  • Putting away money for retirement is like giving yourself a raise. It’s money that gives you freedom when you want it-and deserve it.
  • The average American spends 18 years in retirement.
  • Today, half of Americans guess when determining their retirement needs. Don’t be one of them. Find out more. Save now and beat the retirement clock.

Types of Retirement Plans

The Employee Retirement Income Security Act (ERISA) covers two types of pension plans: defined benefit plans and defined contribution plans.

A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee’s behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the employer’s contributions. Employers may no longer set up Salary Reduction SEPs. However, employers are permitted to establish SIMPLE IRA plans with salary reduction contributions. If an employer had a salary reduction SEP, the employer may continue to allow salary reduction contributions to the plan.

A Profit Sharing Plan or Stock Bonus Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan include a 401(k) plan.

A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.

An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan in which the investments are primarily in employer stock.

A Money Purchase Pension Plan is a plan that requires fixed annual contributions from the employer to the employee’s individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.

A Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant’s account is credited each year with a “pay credit” (such as 5 percent of compensation from his or her employer) and an “interest credit” (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Retirement Tips for Individuals

Set a Goal – “I think I can save $25 a paycheck.” It’s easy to procrastinate so set up a “painless” payroll deduction for saving. It doesn’t matter if the money goes into a 401(k) plan, an IRA or into a plain, old-fashioned savings account, just start saving. You can start with a small amount and increase it whenever your circumstances allow – like when you get a raise, your car payments end or you get a bonus. Pay yourself now, you’ll thank yourself later.

Open an IRA – IRAs are easy to get, easy to contribute to and easy to save with. Most Americans can set up an IRA – whether it’s a traditional IRA or a Roth IRA – and save on taxes. Find out more about IRAs from your bank or financial institution or the resources below.

Learn About Your Employer’s Retirement Plan – If you are covered under your employer’s retirement plan, your employer is required to give you a plain language explanation of the plan call a “summary plan description.” It describes your rights under the retirement plan. To get a summary plan description, ask the plan administrator or your employer.

Review Your Individual Benefit Statement – Your individual benefit statement shows your total plan benefits and the amount that is vested, or fully owned by you. To get an individual benefit statement, ask your plan administrator or employer.

Take Your Required Minimum Distributions – If you are 70-1/2, you are generally required to receive a required minimum amount from your qualified retirement plan or IRA by year-end.

Review Your Social Security Statement – The Social Security Administration likely sends you a Social Security Statement each year about three months before your birthday. This statement is your personal record of earnings on which you have paid Social Security taxes and a summary of estimated benefits you and your family may receive as result of those earnings. These benefits include retirement benefits and protection in case you become disabled or die before retirement age. For more information and to request a Social Security Statement, go to www.ssa.gov.

Learn About Your Spouse’s Retirement Plan – Many retirement plans provide benefits for spouses. For example, your spouse’s plan may provide that you will receive an annuity unless you consent to distribution in another form. Before signing, read and understand any waiver or consent forms for your spouse’s retirement plan distributions.

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