Introduction to Retirement Planning

Retirement planning involves an analysis of the various choices you can make today to help provide for your financial future. To make appropriate choices, you need to predict--as well as you can--your future economic circumstances. You'll also need to establish your post-retirement goals. When you've determined how much of an income stream you'll probably require in the future, you'll be in a position to make wise choices now about income, saving, investments, and employer-sponsored or other retirement plans.

Of course, you need to tailor your retirement planning to your own unique circumstances--planning methods may be different for employees and executives than for business owners. And no matter who you are, you'll probably want to gain some familiarity with the Social Security system, with post-retirement health care insurance coverage, including Medicare and long-term care (LTC) insurance. For some people, retirement may be an eagerly anticipated event, an opportunity to enjoy so many things that working may have precluded--travel, hobbies, and more family time. For other people, even the word "retirement" may conjure up feelings of fear or dread, particularly for those employees who work without the benefit of pension or other retirement plans. And newspaper stories predicting the collapse of the Social Security system can certainly compound anxiety. Whether you are financially comfortable or are of limited means, however, retirement planning is possible and can help you take control of your own future.

To determine your retirement income needs, you'll want to evaluate your present circumstances--your income, your expenses, your assets, and your debts. Next, you'll need to think about your future circumstances. There are four main sources for your retirement income: Social Security, pensions or other retirement vehicles, your investment portfolio, and savings. If you predict that your current income will not provide you with your desired retirement lifestyle, there are certain steps you can take now to help change your circumstances.

You'll want to think about your future sources of income, but also about where you'll live. Will you continue to live in your current home, for instance, or will you move to a condominium or retirement community? And if your employer typically provides early retirement packages to its employees, you'll need to know how to evaluate such packages from a number of perspectives.

Learning how to save for retirement is imperative. There are a number of retirement vehicles available, including traditional and Roth IRAs, employer-sponsored retirement plans, nonqualified deferred compensation plans, stock plans, and commercial annuities. Proper retirement planning requires an understanding of the workings of these tools.

In addition, your personal investment planning can help you on the road toward your retirement goals. The sooner you start, the longer you'll have to accumulate funds for retirement.

You'll want to understand the taxation of your retirement and investment vehicles. This is especially important since the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act). The 2003 Tax Act reduced the capital gains tax rates and the tax rates of certain dividends, making the decision to allocate assets inside or outside a retirement plan more crucial.

Finally, you may want to learn strategies for handling the competing demands of educating your children and retiring.

Effective retirement planning involves not only an awareness of the types of savings vehicles available, but also an understanding of taking distributions from these vehicles. In particular, you should be familiar with the income tax ramifications of distributions (including a possible 10 percent premature distribution penalty tax for distributions made prior to age 59 ½). You may be interested in knowing whether you can borrow money from your retirement plan, whether it is better to receive your retirement money in one lump sum or in monthly checks, and whether you can roll your retirement plan balance into an IRA.

In addition, you may be concerned about naming one or more beneficiaries for your IRA or employer-sponsored retirement plan. What are the tax implications? What about required minimum distributions from the plan after you reach age 70½?

A number of additional retirement planning tools are often available for executives, such as nonqualified deferred compensation plans offered by employers to their key employees. If you're an executive, you should realize that nonqualified plans and stock plans can be valuable tools for retirement planning. You should understand the mechanics of the special benefits afforded by your employer, including the tax implications for you.

If you are a business owner, on the other hand, you have some special retirement planning concerns of your own. In particular, you may want to plan for the succession of your business to family members or to others. You may also want to know which retirement plans are best suited to your form of business.

If you're planning for retirement, you should also consider the Social Security income (if any) you'll be receiving in the future. In fact, it is possible for you to estimate your Social Security benefits ahead of time. You may want to check your Social Security record periodically to ensure that you have met the eligibility requirements and that your information is accurate and complete.

You'll also want to become familiar with ways to optimize your Social Security benefits and minimize their taxation. The timing of your receipt of benefits can be important, as can the impact of post-retirement employment. Other governmental programs should also be considered when planning for retirement.

In particular, you should review the topics of Medicare and Medicaid. You should know what Medicare does and does not cover and what other health care options are available to you. How expensive are these governmental and supplemental health programs? What are the eligibility requirements? Medicaid planning can be particularly important for people of modest means. You should know the Medicaid eligibility requirements, the penalties for transferring assets inappropriately, and the various strategies available for protecting assets. In addition, you should become familiar with the specific methods of protecting your personal residence and the extent to which your state can impose liens on your property and pursue recovery remedies after your death. If you are planning for your post-retirement years, you should also gain some familiarity with long-term care insurance, nursing homes, retirement communities, assisted living, and other housing options for elders.

If you work for the federal government, a state government, a railroad, or if you are in the military, your retirement benefits may be subject to special rules. You should know how your retirement plan works, what distribution rules apply, how your survivors can benefit, how your plan may be integrated with Social Security, and what tax rules apply.

IMPORTANT DISCLOSURES: Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.