We all have great dreams for retirement. Traveling the world.
Moving closer to the grandchildren. Working for a charity.
Whatever your dream, it will almost certainly require cash. And
that requires retirement planning.
“The key to saving for retirement is to start as early as
possible,” says Penny Considine, CPA, CFP(c), with Durbin &
Bennett LLP in Austin, Texas. “Saving early gives you more time to
realize appreciation on your investments and allows you to benefit
from the compounding of interest and dividends.”
In other words, start now.
TIP: If you don’t think you can afford to put aside enough money
now, put away what you can and create a budget to set aside more
later. Or, re-evaluate the importance of future lifestyle
requirements vs. current needs.
“First, establish your goals for retirement, including your
target age to retire and how much money you will need to fund your
lifestyle for your life expectancy after retirement,” Considine
TIP: Life expectancy continues to increase each year. Make sure
you check current tables so you’ll be planning with the most
accurate information available.
When doing your retirement planning, focus on the controllable
factors such as spending, savings and the number of years you think
you will work.
Don’t forget about expenses you may incur before retirement,
such as your children’s education, and those you may face during
retirement, such as medical costs and inflation.
“An additional pre-retirement expense that is often overlooked
is disability insurance,” Considine adds. “Ensure you have
sufficient coverage while you are still healthy and can afford
Once you’ve got all the numbers together, compare your required
funding amount to your available retirement assets.
TIP: Your bank may have a worksheet or calculator posted on its
Web site or available at an office. Consult a financial planner if
you need extra help.
Retirement planning can affect your taxes, providing potential
tax savings or allowing deferrals.
“In some cases, pretax money can be set aside; in other cases
money can grow tax-deferred,” explains Mathew Greenwald, president
of Mathew Greenwald & Associates in Washington, D.C. “Taking
proper advantage of this can reduce current and future taxes. Of
course, when the money is taken out at retirement, taxes will be
due. But at that time most people are in a lower tax bracket, and
the money has grown at a faster rate,” he said.
TIP: Any tax-deferred vehicles that you own could be subject to
the “income in respect of decedent” rules in your estate, which
subject them to income tax as well as estate tax. Check with your
estate planner or attorney.
While you can do retirement planning yourself, don’t hesitate to
seek help from your banker, accountant, attorney, estate and/or
After all, you’re earning a good retirement.
When It Comes to Saving for the Future...
There are numerous retirement options available for
self-employed professionals and small business owners:
Simplified Employee Pension This pension structure allows an
employer to fund an employee’s retirement or a self-employed person
to fund his or her own pension without a lot of complex
Rules now allow an employer to make a tax-deductible
contribution of either $40,000 or 25 percent of an employee’s
compensation, whichever is less.
Distributions are subject to tax, based on the same rules as an
Savings Incentive Match Plan for Employees This plan is
available to business owners with 100 or fewer employees. The plan,
which involves little paperwork, can be structured as an IRA or a
The maximum elective deferral for each employee this year is
$8,000. An employee who is 50 or older may make an additional
contribution of up to $1,000.
An employer also can make contributions on an employee’s behalf,
subject to certain rules.
Section 401(k) Plans The self-employed and small-business owners
can take advantage of these plans but they can be time-consuming to
administrate and expensive.
401(k) plans currently allow an employee to make elective
deferrals of as much as $12,000. Anyone 50 or older may contribute
an additional $2,000.
Employers can match contributions beyond the $12,000 limit.
Defined Benefit Plan This plan, commonly called a pension,
promises an employee a fixed benefit upon retirement.
The employer’s annual contributions to the plan are based on the
amount actuarially needed to provide the fixed benefit at a normal
Traditional Individual Retirement Account (IRA) This year $3,000
is the maximum amount that may be contributed to a traditional IRA,
although an individual who is 50 or older may contribute an
additional $500 without penalty.
Earnings are taxable only at distribution, so funds can accrue
on a tax-deferred basis.
Anyone who is not covered by an employer’s qualified plan or who
earns less than established income limits may deduct
Roth Individual Retirement Account (Roth IRA) Contributions to a
Roth IRA are never tax-deductible. However, qualified distributions
from the account, including accumulated dividends, interest and
capital gains, are tax-free.
The total combined contribution limit to both an IRA and a Roth
IRA is $3,000 for 2003, although there are limitations for adjusted
gross incomes of more than $150,000 (filing jointly) or $95,000