Are you considering different annuity options for your retirement portfolio? An annuity is a type of insurance product, purchased from a life insurance company and/or an annuity company. Annuities are popular retirement options due to the safety they offer for your money, the potential for tax-deferred growth, and their reliability for giving permanent, lifelong income.

That being said, sometimes it can be confusing when you try to make sense of different annuity types, contract features, benefits, and downsides. Since you would commit a sum of your money to an annuity contract for a period of time, it’s prudent to do research and develop an understanding of your annuity options before committing to any financial decision. Here is a short guide to help you get started on understanding the different annuity options.

Fixed Annuities

There are a number of annuity options of the “fixed” variety. These types of contracts come with a guaranteed, fixed interest rate. The insurance company also guarantees your principal, or original sum of money put into the contract. A fixed insurance contract tends to offer a high degree of safety and lower risk for retirement money.

Annuity contracts of the fixed variety include: a fixed annuity, a fixed index annuity, and a multi-year guarantee annuity – also known as a fixed-rate annuity. Within these fixed-type contracts, the insurance company will guarantee the principal that you put into the contract and provide you with a guaranteed interest rate over time. This is a low-risk instrument with terms that can range between 3-12 years.

Generally speaking, when purchasing other fixed-type annuities, an investor can opt for a multi-year guaranteed rate with a higher rate during the first year and slightly lower rates over the upcoming years. This gives retirement savers a fixed blended rate over the duration of the contract. Alternatively, you can also choose a banded interest rate, which guarantees a very high interest rate the first year, and a fluctuating interest rate in the coming years, with a guaranteed minimum rate of interest.

Fixed Index Annuities

As mentioned earlier, fixed index annuities are one type of overall fixed insurance contracts. They are a low-risk instrument, but interest gains are tied to an index, like the S&P 500 price index. In this case, the insurance company might credit your contract the higher of the two interest rates – a minimum guaranteed interest rate, which can range between 0-2%, or an interest rate based on the values of the linked index.

Why potentially 0%? It’s because the insurance company protects your money when the index experiences negative changes in value. When the index “goes down,” the insurance carrier keeps your principal and earned interest intact, so your fixed index annuity doesn’t lose value due to negative index changes.

Market Value Adjusted Annuities

Another option when it comes to fixed annuities is to opt for an annuity with a market value adjustment (MVA). Contracts with an MVA are called market value adjusted annuities. The interest rates on market value adjusted annuities are typically slightly higher than regular fixed annuities. This is because the insurance company shares some of its risk with the annuity contract owner.

While your principal and interest rates are fully guaranteed if you carry the annuity to term, if you choose to withdraw before the term is up, there may be higher surrender charges depending on whether interest rates rise or fall.

Variable Annuities

Unlike fixed annuities, variable annuities are securities products. The insurance company will create a portfolio of investments on your behalf, sort of like you would with mutual funds. Of course, this means that you have the potential for much higher returns on investment. But the trade-off is you hold much more market risk, or the potential to lose money when in-contract investments fall in value.

You can have your principal guaranteed within some variable annuity products. However, it can be expensive. You will most likely pay hefty insurance and administrative fees for that benefit.

When purchasing a variable annuity, you will have to pay annual fees on the core annuity, surrender charges if you choose to withdraw your money early, and optional rider fees, depending on the additional features you may want.

As with all annuity contracts, you will pay a 10% penalty to the IRS if you make withdrawals before you are 59.5. Income tax will apply to your withdrawal sums, as well. While surrender charges and IRS penalties are similar to those of other annuity options explained in this post, annual fees and optional rider fees might be especially costly with variable annuity contracts.

All told, variable annuity costs can range from 2-7% per year, depending on a number of factors, including contract riders and the fees you might be paying for them. These costs put additional weight on the need for the investments within the contract to perform well.

Qualified vs. Non-Qualified Annuities

The terminology “qualified annuities” and “non-qualified annuities” applies to both fixed and variable annuities. The difference between the two is the type of money you are putting in the contract.

In the case of a qualified annuity, you are putting in pre-tax money, or funds that have not yet been taxed by the IRS. This money will grow tax-deferred. Then it will be taxed once you begin taking withdrawals from your annuity at a rate determined by your tax bracket at that moment.

A non-qualified annuity is designated by the IRS as when you have already paid taxes on the money that you are putting into the annuity. That means that when you withdraw it later on, only the earned interest will be subject to income taxes.

Deferred vs. Immediate Annuities

Once again, the annuity options explained earlier in this article can be deferred or immediate contracts. Deferred annuities are long-term instruments, which can be left alone for years before you begin to withdraw money from them.

If you want to avoid unnecessary penalties, it makes sense to avoid making withdrawals before you turn 59.5. So anything you put into an annuity before that will typically be deferred to a time when you expect to need income, which is often after retirement.

On the other hand, an immediate annuity starts paying income benefits almost right away. Your income payments may begin anywhere from one month to a year later. More information about immediate and deferred annuities, and other definitive contract features, can be found on our Annuity Types page.

Lifetime vs. Fixed Period Annuities

Another thing to consider when purchasing an annuity is the payout terms you want to establish. One option is to have the annuity paid over a fixed period of time, for example during 10 years. In this case, the amount to be paid will be calculated based on the principal and the interest rate.

The other option is to have the payments spread out over a lifetime, or until the recipient, also referred to as the annuitant, dies. In this case, the insurance company will use actuarial variables, including the person’s age, the contract amount, and an interest rate to determine monthly or annual payments. You can also add a guaranteed period in case the person dies very soon after the annuity starts paying out. This contractual guarantee can ensure that the policyholder’s heirs will continue receiving payments for a specific period of time. If you would like to learn more about the lifetime income benefits of annuities, including more about income riders, check out this article on Guaranteed Lifetime Income.

Some Final Thoughts on Different Annuity Options

There are many conditions to consider when exploring your annuity options. A retirement investor needs to consider the contract term and conditions, contractual features and benefits, what types of guarantees they get, and how strong those guarantees will be, depending on the insurance carrier’s financial strength and claims-paying ability.

You will want to consider other variables, including potential payout terms, how long it might be before you need your money, and what type of money you will want to pay into the contract. Additionally, be sure to assess how much risk you would like to have within the annuity. If financial safety is important, contracts of the fixed variety may be more appropriate.

Finally, be sure to look out for the best guarantees from the insurance company, including interest rates that can benefit you. It’s also important for you to understand all the terms and conditions of any annuity contract you may be exploring. Working with a financial professional who understand these contracts is a prudent course of action.

You may want to create a comparative analysis of different annuity options and have a financial professional explain them to you. We are a SafeMoney.com Professional ready to help

 

The short answer? Immediate annuities actually don’t come with an accumulation period. Once you have paid premium into the contract – in most cases a one-time lump – the insurance carrier will start income payments nearly right away. Your income payouts may start anywhere from 1-12 months after the premium payment date.

When this starting date is depends on your contract and frequency of payments. You may receive income on a monthly, quarterly, or even annual basis. Many contract holders opt for a monthly payment schedule.

The insurance carrier puts the entire sum of your premium into a pool of other premiums it has been paid. Then it allocates these premiums into conservative, low-risk investments. In return, the carrier pledges to make payments to you – or someone you specify – for a specified period of time, which can be for the rest of your life. The income you receive includes a fixed sum and interest paid on a continual basis.

Therefore, immediate annuities don’t have an accumulation period – there is little time between when you pay premium and start receiving income. Many immediate annuity contracts start income payments just a month after the day you bought your annuity.

Where accumulation periods do apply is with deferred annuities. In these contracts, your money will be left alone for a number of years before you start taking income. Let’s get into more details below.

Immediate and Deferred Annuities

Like their name says, deferred annuities are contracts in which you ‘defer’ receiving income payments for a specific timespan. During this time, your money grows in the deferral period. Since this is the time before you start taking income, it’s called the “accumulation period.” The period when an insurance carrier pays you income is called the “distribution period.”

In terms of length, accumulation periods can vary quite significantly in different contracts. An important point to remember is the longer you wait and the more premium you put into the contract, the higher your future income will be.

Unlike deferred annuities, immediate annuities have no period of deferral. Their benefit is they provide a steady income stream nearly right away, and contract holders can pretty much “get it and forget about it.” Once an immediate annuity contract is in place, the only thing you have to do is collect your income payments and monitor the cash-flow. Immediate annuities can take away the “stress” of monitoring market activity, tracking interest rates, or keeping an eye on dividends for income purposes.

On the other hand, deferred annuities can provide more income than immediate annuities. The accumulation period of deferred contracts gives your money time to grow. And generally speaking, the longer you wait, the more income you may receive.

How Accumulation Period May Factor into Annuity Purchase Decisions

From that standpoint, some retirement savers may ask if they should purchase an immediate annuity or a deferred annuity. The answer is it depends. Any annuity buying decision, and a decision regarding any financial product in general, should be carefully weighed according to many variables. This article doesn’t cover what those annuity planning variables might be, but one important consideration is the surrender period tied to deferred annuities.

Most deferred annuities will have surrender periods built into their contracts. Surrender periods apply in the early stages of the accumulation period. For fixed annuities, a surrender period can last anywhere from 3-10 years. Among fixed index annuity contracts, a surrender period can be 7-15 years long, with many index contracts specifying 10 years.

If you choose to withdraw money or give up the contract during the surrender period, you will likely have to pay a surrender charge. Surrender charges can be up to 10% of your contract value. However, most deferred contracts allow you to withdraw a certain percentage of your money without penalty – often up to 10% of your contract value. However, keep in mind that withdrawals before age 59.5 may be subject to a 10% IRS penalty, and income taxes apply to contract withdrawals.

With that said, many deferred annuities may come with an income rider. This is an add-on feature which can let you access your money, via withdrawals, earlier in the contract.

How Are Premiums Calculated?

As stated earlier, contract withdrawals before age 59.5 are called “early withdrawals.” They can be hit with a 10% IRS penalty. For this reason, many people opt to purchase immediate annuities when they are retired or past 59.5 years old. In fact, most Americans choose to purchase annuities after the ages of 65-70 to maximize their payouts.

In the case of a straight life annuity, the insurance company will calculate the anticipated interest rate, the principal, and the annuitant’s life expectancy to determine the amount they will receive periodically until death. If the person dies before their life expectancy, their heirs may not be entitled to any remaining money. That said, if the annuitant outlives their life expectancy, they will still continue receiving income. For this reason, many people who are worried about outliving their savings purchase immediate annuities and ensure a stable lifetime income.

There are also other types of immediate annuity contracts that ensure your principal. For example, a fixed term immediate annuity will pay out during a specific amount of time, such as 10 or 20 years. If someone passes away before the fixed period is up, then their beneficiary will receive the rest of the income.

Another option is an immediate annuity with a refund feature, meaning that if the annuitant dies before the full premium is paid out, their beneficiary will receive a lump sum or period installments refund. Additionally, couples can opt for a joint annuity, whereupon the death of one of the spouses, the other will continue receiving income from the annuity.

Closing Thoughts on Immediate Annuities

For many people worried about income and financial safety, annuities can be an attractive option. They offer a high degree of security, they can provide a guaranteed income for as long as someone lives, and they may deliver other benefits.

However, for those who are already retired, an immediate annuity can provide peace of mind. It will start paying income nearly right away. But you should be mindful of a number of factors when considering different options, including what your actual payout amount will be and how long the guarantee will last for.

For those who are worried about not having enough savings for retirement, an immediate lifetime annuity can be an excellent choice. Alternatively, if someone isn’t in great health, it may be a good idea to ensure refund or spousal privileges are part of your immediate annuity contract.

Need help with finding the right immediate annuity strategy for your needs and goals? We are a Financial professionals at SafeMoney.com ready to help you.

Good news: People are living longer. But it does come with downsides. For one, increasing lifespans bring greater financial risk, like outliving your retirement money or forking over income for costly health expenditures. Then there is the evolving question of what a longer retirement looks like.

Just some decades ago, many Americans shared a common vision. You worked for the same company for years, often in exchange for a defined-benefit pension. Then you left your job and shifted into a post-work lifestyle, drawing on your pension and living comfortably.

However, times have changed. As evolving trends and statistical projections indicate, retirement could last as long as 20-30 years, or perhaps even 40 years! Now it’s hard to define what retirement should be. That brings yet another challenge: How can we prepare financially for an extended post-work lifespan?

If you wonder about what you can do, here are some quick tips you can put into action. Before we go into those, let’s address an important topic affecting the near future: the pace at which longevity has changed over time.

How Quickly Has Longevity Evolved?

Life expectancy statistics paint a compelling picture. In 1900, life expectancy rested a little north of 47 years. Over the next 28 years, it gradually increased, as the graph illustrates below.

From there, life expectancy takes a drastic, upward surge. In 1950, it was 68.2 years. By the end of the 20th century, it increased to 77 years – a 30-year gain in just a century. Historically, this was an unprecedented leap forward in quality of life improvements – and the rapid pace at which those gains arose was equally historic.

In 2015, life expectancy reached 78.8 years. The point is quality of life standards have evolved rapidly. This raises the question of how we can prepare to live longer, and live comfortably, moreso than our predecessors did. It’s certainly an interesting question as long-term retirement planning models continue to evolve, and one we should consider as we discuss ways to plan for longevity, below.

Steps to Prepare for Longevity in Retirement

Look past life expectancy. When planning for retirement, what should you use as an age benchmark? The problem with life expectancy is it’s just an average. It’s an estimate of how one-half of people will pass away before attaining it, and the other half will exceed it. Financial planning for up to an older age in retirement is definitely a prudent tactic.

An age benchmark that financial professionals are increasingly turning to is probability of reaching select ages. In a survey commissioned by InvestmentNews, advisors reported using an average lifespan of 91 for men and 94 for women in retirement income plans. According to the Centers for Disease Control and Prevention, in 2014 a 65-year-old woman could expect to live for another 20.5 years, and a 65-year-old man another 18 years. Future projections indicate there could be 1 million people reaching age 100 in the United States by 2050, as well.

The point is a planning marker using later-term ages, whether in the form of probability of reaching a select age or a fixed planning horizon up to a certain age, is better than use of life expectancies. For couples, it’s important to account for partner timelines in financial planning, as well. Data from the CDC indicates women are likely to outlive their partners.

Develop a clear vision for your post-work lifestyle. When it comes to pre-retirement lifestyles, we tend to take cues from social norms and our parents’ example. Some common life goals for many Americans that fall before retirement include:

• Working on your career or business
• Attaining a satisfactory level of professional success
• Achieving higher levels of income-earning power
• Buying or building a home
• Getting married
• Having children
• Working toward a certain net-worth
• Developing robust personal and professional social networks

However, post-work narratives aren’t as clearly defined or laid out. In many cases, people may be working with a blank slate in terms of their retirement goals and expectations. And as lifespans increase, the golden years might well be mixed chapters of recreation, work, volunteering, and other forms of community involvement.

So, develop a clear vision for what you hope to achieve in retirement. Do you and your partner have travel aspirations you have been putting off? Do you want to start your own business? Pursue consulting opportunities, but on your own time? Want to spend as much time as possible with loved ones, such as grandkids? Become more involved with your community or social networks relating to your personal passions?

As you and your partner envision your ideal lifestyle, unpack expected day-to-day activities from more infrequent objectives, such as traveling to another country. This will help distinguish expenses tied to these objectives into different areas of retirement spending, and help separate daily living expenses from more infrequent, miscellaneous expenditures. Then you can develop a clearer picture of what your monthly fixed-income needs are likely to be over the long run.

Tip: Read “5 Steps to Building an Effective Retirement Plan” to help you prepare for greater retirement success.

In the financial planning process, then it’s a matter of shifting from an accumulation mindset to an income and spending mindset. Your retirement plan should include long-run projections for monthly household budgetary needs, based on anticipated monthly and miscellaneous spending goals, and be matched with the income sources from which you will pay for those needs.

Consider working part-time to offset effects of increasing longevity risk. Work life extensions may be beneficial in a number of ways. Under various retirement planning models, such as the 4% withdrawal rate strategy, people may be depleting their nest egg for 20-30 years or longer. That could lead to considerable anxiety, even if someone’s financial resources are quite extensive. Maintaining some participation in the workplace can not only help supplement your finances with additional income, but help combat inflation. Wages tend to increase over time.

However, if you do work longer, there are downsides along with the upsides. Working longer may not be in the cards for as long as we would like. According to research from LIMRA Secure Retirement Institute, 49% of retirees say they retired earlier than they planned, with a plurality reporting health being the primary motivating factor.

Retirement employment can also affect income from Social Security. You are eligible to claim your benefits starting at age 62. For many baby boomers, the Full Retirement Age is 66. If you elect to claim your benefits before your Full Retirement Age, your benefits could be permanently slashed.

For every $2 of earnings above $16,920, the Social Security Administration deducts $1 of benefits. And if you claim in the year of your Full Retirement Age, but months before your actual FRA date, $1 of benefits will be deducted from every $3 of earnings over $44,880. Make sure any working plans account for these potential downsides.

Consider diversifying income sources. As you consider the long-term picture, consider what sources of income you’ll be drawing from. Some questions to consider:

• What asset allocation does your portfolio and overall financial holdings have? What is your diversification strategy for retirement?
• Does it offer the right level of safety for your income – particularly protection from effects of market volatility?
• Are they optimized to generate the lifelong income you will need in retirement, possibly for as long as 20-30 years or even more?
• What are the tax implications of when you will be drawing income from those sources?
• How does the timing of your Social Security claiming tie into your overall income planning picture?

Remember, we have talked about how retirement can well last for many years. If you worry about having sufficient income certainty for all that time, you may want to consider strategies offering permanent, lifelong income you can rely on for all your retirement years.

We are Financial Professionals with SafeMoney.com

When it comes to lifestyle, it can be said that we have “two” lives – or rather two different life phases. The first phase is the working years, or when we work for a living. The second phase is retirement, or when we can choose to stop working, should we desire to, and do what we want. From volunteering or spending time with family to social gatherings, vacation getaways, gourmet dining, or personal luxuries, there’s no shortage of ways we can enjoy our time in retirement.

However, many Americans who are retired or nearing retirement face unique barriers – financial challenges which can keep them from enjoying the lifestyle they worked hard for. Preparation is key, so the importance of planning ahead can’t be overemphasized. Here’s a quick look at some common financial challenges to account for.

Common Financial Challenges

1. Household debt. One challenge that can stretch retirement finances thin is household debt. A study by the Employee Benefit Research Institute on American households aged 55 and older from 1992 to 2013 illustrates this. Research found 64% of retired and near-retired households had financial liabilities in 2013, up from 53.8% in 1992.

• The biggest issue was mortgages and home-equity debt. 42% of households aged 65-74 were saddled with housing debt, a 24-point jump from just 18% in 1992.
• Recent data from the U.S. Bureau of Labor Statistics helps confirm this – housing expenses, which include mortgage payments, was the biggest spending category for retired households in 2014.
• Student loan debt is a surprising factor in retirement. According to the Government Accountability Office, senior citizens had $18 billion in student loan debt in 2014, up over 600% in less than a decade. Over 20% of the student loan debt was for helping children with educational expenses such as college.
• In more recent statistics, credit card debt has proven influential. Among American households aged 65-69, average credit card debt is $6,876 – over 200% more than maximum monthly income payouts you can get from Social Security.

2. Low interest rates. For retirement income, many Americans draw on earnings from low-risk, interest-bearing assets such as bonds. However, interest rates have stayed at historical lows. Much of this was attributable to interest rate-setting policy by the Fed. For almost a decade, the Federal Reserve had kept interest rates very low to spurn business borrowing and consumer spending. But the low rate-setting reduced earning potential for interest-bearing vehicles like savings accounts and CDs, which diminished earnings income for retirees.

There has been talk of the Fed raising interest rates. But according to notable economists like Mohamed El-Erian, Fed officials have been hesitant to fully commit to a raise increase, given economic data indicators. This may mean that we may be in a low-interest rate environment for even longer, which affects dependable income from CDs, bonds, money markets, and other interest-earning vehicles.

3. Fears over stock market volatility. The financial crisis happened quite some time ago. But many retiring Americans can remember its aftereffects. Between September 2007 and December 2008, the stock market lost 47% of its value – an $11 trillion decline, according to the Urban Institute. Being worried about suffering losses and other concerns, older Americans have stayed on the sidelines and stuck with lower-risk vehicles.

In the article link about the Fed and El-Erian’s commentary above, El-Erian opines that the Fed should be worried about keeping interest rates low for so long. As interest rates stay low, asset prices become inflated and investors seek vehicles with greater market risk to receive higher returns. For Americans who are retired or approaching retirement, this could put hard-earned life savings at greater risk to losses, due to a falling market.

4. Soaring health costs. From 1999 to 2015, overall inflation ranged from 0.1-4.1%. But healthcare inflation has been rapidly increasing. According to HealthView Services, a healthcare research firm, health costs may rise faster than other goods and services. HealthView projects that for someone who retired in May 2016, healthcare costs could increase by 5.1% over the next 20 years.

Unfortunately, Medicare doesn’t cover all medical expenses. As we age, out-of-pocket expenses can be quite costly. In future dollars, a healthy 65-year old couple retiring in 2016 may pay as much as $567,903 in total retirement healthcare expenses, including costs like deductibles, co-pays and vision-related care expenses. The importance of being ready for this is critical – just 12% of working Americans have taken steps to prepare for future healthcare needs, according to a study by the Empower Institute and BrightWork Partners.

What about Your Financial Future?

These are just a few challenges facing retiring Americans. Of course, challenges will vary from individual to individual. No matter what your age or situation is, now is always a suitable time to get ready.

If you would like personalized guidance on creating a financial plan that offers income security and keeps your life savings protected from market declines, SafeMoney.com can help you. We are an independent financial professional, and you can request a personal strategy session to discuss your needs and goals.

Is your retirement income plan well-suited to your financial needs and goals? Whether you’re creating a personalized strategy or examining one, it’s an important question to consider. After all, any income gaps or shortfalls could lead to real financial setbacks.

With that said, here are some markers you can use to evaluate your income strategy.

Evaluating Your Retirement Income Plan

Are there any income gaps? Many retirement plans are incomplete. In many cases, they don’t have enough income sources to cover all monthly living expenses. If you would like to maintain your present lifestyle, it’s important to estimate what you’ll need coming in – especially when accounting for the effects of inflation.

This can be accomplished by weighing projections for monthly expenses (what we think of in 30-day financial cycles, like mortgage payments and utilities) and miscellaneous costs against the income you’ll have to pay for those needs. Our “building an effective retirement plan” blog post can help with creating those spending projections.

One key is to distinguish between sources of permanent income – or guaranteed income from Social Security, pensions, and income vehicles like annuities – and maybe income – or income drawn from more volatile sources, like stocks and bonds. Once you have done estimates for income and sources, determine gaps, if any, between your income and the needed income to maintain your lifestyle. Then it’s a matter of determining how to fill those gaps.

Does your strategy rely too much on volatile investments? Retirement income planning isn’t the same as investment planning. For one, investment planning focuses on different markers, including net-worth, investor returns, and investment values. Retirement income planning uses the marker of monthly income to determine goals and means to attain them.

Let’s go back to the discussion of permanent income versus maybe income. Because monthly living expenses are recurring fixed costs, an income strategy should leverage permanent income sources to pay for them. Should the market swing down, maybe income sources will dip in value – which will dilute the income you can draw from those assets. And timespans for recovery are far shorter in retirement than when we’re accumulating assets during our working years.

In short, using maybe income for monthly living costs can leave your retirement financial security too exposed to market risk. Your income strategy should include a guard against market downfalls, suitable to your age, needs, and situation.

Does your strategy account for longevity? Life expectancies are on the rise, and it raises the possibility of longevity risk – or running short of money in retirement. On the whole, a retirement lifetime can last for 30 years or even longer. It’s critical to ensure you’ll have enough income to pay for all those years you may live.

If you’re worried about outliving your money, annuities can help shore up financial security with their income guarantees. An annuity is one of the few vehicles which can generate permanent, guaranteed income for as long as you live. Depending on your needs, your strategy can adopt immediate or deferred annuity income sources to last throughout your golden years.

Need Help with Your Income Strategy?

As mentioned, retirement planning is a different process than investment planning. It may be helpful to work with a qualified income strategist. They can help you determine your needs, goals, and circumstances, and then create a strategy suited to your requirements.

If you’re ready for personal guidance from a financial professional, SafeMoney.com can help.

We are an independent financial professional with SafeMoney.com and you can request a personal strategy session to discuss your needs and goals.

Ask the Right Initial Questions

A good start to creating a successful retirement plan involves careful analysis. Answer these questions:

• At what age would you like to retire?
• How much do you currently have in retirement savings?
• What are your current living expenses?
• Based on an assumed inflation rate of 3-5%, what will your future living expenses be?
• Do you plan on working part time?
• What are your post retirement goals?

You need to tailor your retirement plan to your own circumstances. Once you have determined what sort of income you will need in the future, you’ll be able to make decisions about saving, investment, and employer-sponsored or other retirement plans. Planning methods should be different for employees, executives, and business owners.

Familiarize yourself with the Social Security system, and look into post-retirement health care insurance coverage, including Medicare and long-term care insurance (LTCI). Effective retirement planning will help you feel in control of your own future, and is possible whether you are financially comfortable or have limited means.

Determining Needs and Goals

You need to evaluate your present circumstances and current financial picture:

• Consider income, expenses, debts, assets.
• What is your income?
• What are your expenses?
• What are your assets?
• What are your debts?
• What does your entire picture look like?

Now consider this in the context of your future circumstances as well as future living expenses. Will you continue living in your current home, or will you move to a condominium or retirement community? Do your children live nearby? Some retirees move to be closer to their families or to areas with a more desirable climate – will this be part of your future goals?

How to Determine Retirement Age and Income Needs

There are four main sources for retirement income:

• Social Security
• Pensions or other retirement vehicles
• An investment portfolio
• Personal savings

If your employer provides early retirement packages to its employees, you’ll need to know how to evaluate such packages from a number of perspectives. If you think your current income will not provide you with your desired retirement lifestyle, there are steps you can take now to change your circumstances.

How Do I Save for Retirement?

There are many retirement vehicles available, including:

• Traditional and Roth IRAs
• Employer-sponsored retirement plans
• Non-qualified deferred compensation plans
• Stock plans
• Annuities

Proper retirement planning requires an understanding of the workings of these tools, and an understanding of how they may be taxed.

This is especially important since the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003. This initiative reduced the capital gains tax rates on certain dividends, making the decision to allocate assets inside or outside a retirement plan more crucial. Another thing to keep in mind is if you plan to pay for your child’s education, you will need to learn how to balance two competing financial needs.

Distributions from Retirement Plan Accounts

You should become familiar with the possible ramifications of distributions, which may include a 10% premature distribution penalty tax if distributions are made before you reach the age of 59.5. There are certain questions you will need to answer.

• Can you borrow money from your retirement plan?
• Would it be better to receive your retirement money as a lump sum or as monthly payments?
• Can you roll your retirement plan balance into an IRA?
• What are the tax implications of naming more than one beneficiary, if you are allowed to do so?
• What are the required minimum distributions, if any, from the plan after you reach age 70½?

What about Business Owners and Their Retirement?

If you’re a business owner, you may want to plan for the succession of your business to a family member or other chosen recipient. You should also find out what retirement plans are best-suited to your type of business.

Suitable Retirement Plans for Small Business Owners or the Self-Employed 

If you’re self-employed or a small business owner, you know that your needs are different from those of large companies. Several types of retirement plans are specifically designed for your situation. Consider setting up one of the following types of plans:

• Payroll deduction IRA plan
• Simplified employee pension (SEP) plan
• SIMPLE IRA plan
• SIMPLE 401(k) plan
• Keogh plan

A Keogh plan is a qualified retirement plan established by a self-employed individual or partnership. Consulting with a qualified financial professional may help you determine the best solution for your needs.

Retirement Plans for Corporations

If your business has multiple employees, one of your goals in choosing a retirement plan should be to balance their needs against the needs of your business. Consider the following retirement plan options:

• Payroll deduction IRA plan
• Simplified employee pension (SEP) plan
• SIMPLE IRA plan
• SIMPLE 401(k) plan
• 401(k) plan
• Profit-sharing plan
• Money purchase pension plan
• Age-weighted profit-sharing plan
• New comparability plan
• Thrift/savings plan
• Defined benefit plan
• Employee stock ownership plan (ESOP)
• Cash balance plan

Retirement Plans for Tax-Exempt Organizations

A tax-exempt organization has unique considerations for setting up a retirement plan because isn’t subject to federal income tax. An employer tax deduction is of little value, for example. There are two types of plans which meet the needs of tax-exempt organizations: a 403(b) plan or a 457(b) plan.

What is a Non-Qualified Deferred Compensation Plan?

You should also consider setting up a non-qualified deferred compensation plan, a flexible plan which does not need to satisfy stringent requirements. You and your employees could also receive greater benefits under a non-qualified plan because there are no limits on employer contributions.

Non-qualified plans do have three disadvantages:

• They may not be as beneficial from a tax standpoint
• They may only be available for a select group of employees
• The assets within are not protected if the employer goes bankrupt

For these reasons qualified plans usually appeal more to employers than employees. Also, if you are an owner and wish to be included under the plan, a non-qualified deferred compensation plan will only be suitable if your business is a regular or Corporation.

We are a financial professional with SafeMoney.com can help you with any questions you may have.