Retirement

Retirement planning is a lifelong endeavor. Recognizing this is the first step to ensuring a financially
secure future. Unfortunately, the statistics show that many of us don't realize the necessity of
planning for retirement. According to a study conducted by the U.S. Department of Commerce, only
5 percent of all Americans are financially independent at age 65. This study further indicated that
75 percent of all retirees are forced to depend on family, friends, and Social Security as their only
sources of income. You can protect yourself from falling into these statistics by planning NOW for
your retirement.

The first step: budgeting for the future
To estimate how much you will need, use your current budget as a starting point. Write down
expenses, remembering that they will change when you retire. For instance, work-related expenses,
such as lunches, clothing, and transportation, will be eliminated. However, you may incur additional
costs for health care or even utility bills, since you may be home more often. And with more free
time, you may decide to spend more money on a hobby or travel.

As you project your expenses, don't forget to consider inflation. To be safe, most experts
recommend assuming a 4 to 7 percent annual inflation rate. Economists feel this level is a
reasonable estimate for the next 10 to 20 years. At any rate, it is advisable to periodically
recalculate how much you will need as you get closer to retirement.

Whether your expenses increase or decrease is partly up to you. Either way, be realistic as
possible when forecasting your expenditures and the resulting budget will be more accurate.

Sources of retirement income
There are four main sources of retirement income:

Social Security
Employer pension plans
Personal retirement savings accounts
personal investments

Some combination of all four sources is essential for a secure and comfortable retirement.

Social Security Benefits
Social Security is the foundation on which additional retirement plans can be built. Benefits are
based on your average lifetime earnings on which you paid Social Security taxes. So the more you
earn, the more you collect.

You should receive an annual statement from the Social Security Administration showing your
earnings and tax record as well as an estimate of the benefit you will receive upon retirement.
Please contact the Social Security Administration if you do not receive this information.

Employer pension plans
Pensions are part of the fringe-benefit package offered to employees by most companies. Be
aware that provisions vary from plan to plan.

One thing that all plans have in common is that they are "tax advantaged." This means that you pay
no taxes on the contributions your employer makes in your name until you withdraw the money.
Also, any interest you earn accumulates tax-deferred until you begin to collect your pension.

Some rules have been mandated for retirement plans. Basically, these rules shorten the time it
takes for an employee to become fully vested.

Personal retirement savings accounts
Personal plans are defined by the Internal Revenue Service as "qualified" retirement plans with
superior tax benefits. Below are a few options:

IRAs

- If you are not covered by any employer-sponsored pension plans, you may deduct IRA

(Individual Retirement Account) contribution. The amount you can contribute will be

determined annually by the Internal Revenue Service and their cost of living adjustments. If

you are covered by a company-sponsored plan, you may still be able to make a tax-

deductible contribution to your IRA, depending on your adjusted gross income.

401(k) Plans

- The amount you contribute to a 401(k) plan is deducted from your gross

income. Furthermore, any interest or dividends earned are tax-deferred until you withdraw

your money. Your plan documents should specify how much you can contribute annually.

Roth IRA

This type of IRA permits nondeductible contributions of up to $4,000 a year.

Earnings grow tax-free, and distributions are tax-free provided no distributions are made until

more than five years after the first contribution and the individual has reached age 591/2.

Distributions may be made earlier on account of the individual's disability or death. The

maximum contribution is phased out for persons with AGI above certain amounts: $150,000 to

$160,000 for joint filers, and $95,000 to $110,000 for single filers (including heads of

households). For 2005, a $500 "catch-up" contribution is allowed for taxpayers age 50 or

older by the close of the taxable year, making the total limit $4,500 for these individuals.

Personal Investments
If you want to maintain your current lifestyle, your own investment holdings should make up part of
your retirement income. Do some investigating to decide which investments are best for you. In
selecting investments, you should consider several factors, such as risk tolerance, time horizon,
liquidity needs, tax implications and diversification needs. A professional advisor, such as a CPA,
can assist you in developing an investment strategy that is consistent with your investment profile
and goals.

Setting financial goals
Planning for retirement requires setting concrete goals. Think about what you really want to do and
how you want to live during your "golden years." Then take a closer look at your personal financial
profile. Review your investments, insurance, credit rating, housing situation, and income to
determine what you'll need for your future. Devise a budget and investment strategy to help you
meet those goals. If you need advice, contact a professional financial adviser, such as a CPA.

The question is "when?"
Deciding when to retire is influenced by many factors. One consideration is life expectancies. The
present life expectancy is nearly 80. However, the Census Bureau expects the percentage of those
age 85 or older to double within the next few decades. As a result, many more people will need
retirement income for as many as 20 to 30 years.

Your employer's pension plan affects your decision on when to retire. Your pension may be
significantly reduced, or even eliminated, if you are not with the company long enough to be entitiled
to your full benefits - or whats known as fully vested. Provisions vary from plan to plan, so make
sure you know and understand the eligibility requirements of your own plan.

Another factor to consider in planning when to retire is Social Security. With the full retirement age
gradually increasing for future recipients, timing will be critical.

How much money will you need?
Experts estimate that in order to retire with financial security, you will need at least two-thirds of your
pre-retirement income. Even so, three-quarters provides a more comfortable margin. In any case,
CPAs recommend that you consider these factors in your estimates:

The number of years you plan to be retired
The lifestyle you would like during those years
The rate of inflation between now and the day you retire

If determining how much money you will need seems impossible, don't despair. A CPA can help you
minimize the guesswork.