Retirement Planning

According to the 2002 Retirement Confidence Survey, 60 percent of workers aged 60 and older have saved less than $100,000 for retirement. That doesn’t leave much time to prepare for a retirement that could last 20 years or more. If you think you may be a bit behind in savings, here are some tips to help you make the most of your final working years.

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Evaluate retirement length and assets

Your asset allocation should reflect your time horizon and investment goals. As you approach retirement, you may want to opt for a more conservative asset mix because you will have less time to weather market fluctuations, should they occur. On the other hand, if you don’t plan to retire for several years, a slightly more aggressive portfolio may help you take advantage of potential market gains.

Investment possibilities with retirement in mind

Consider a split annuity

With a split annuity, your savings are divided into two portions: an immediate annuity, which can provide guaranteed retirement income, and a deferred annuity, which can keep your savings accumulating over time. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. In addition, if you surrender the contract before age 59½, you may be subject to a 10 percent federal income tax penalty. The guarantees of annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Generally, variable annuities contain mortality and expense charges, account fees, investment management fees, and administrative fees. Variable annuity sub-accounts fluctuate with changes in market conditions, and when surrendered, the principal may be worth more or less than the original amount invested. Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus only. Be sure to read the prospectus carefully before deciding whether to invest. The deferred annuity can be fixed, meaning it pays a guaranteed rate of return, or variable, meaning it allows you to pursue investment growth in the market. During the early years of retirement, the immediate annuity would provide a steady source of income. After it becomes depleted, assets from the deferred annuity could potentially be used to replace it.

Contribute more to an IRA or a 401(k)

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Increasing your retirement plan contributions not only boosts your tax-deferred savings potential, but it may also help reduce your current taxable income. Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10 percent federal income tax penalty.

In 2003, you can contribute up to $12,000 to a 401(k) or other employer-sponsored retirement plan, subject to plan limits. An additional $2,000 in catch-up contributions can be made by those aged 50 and older. Up to $3,000 can be contributed annually to an IRA in 2003 and 2004, or $3,500 for those aged 50 and older.

Maintaining a comfortable lifestyle throughout retirement requires prudent investing and sound financial management. This can be especially critical in the years leading up to retirement, when your earning power may be at its peak.

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