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Unformatted text preview: 1 TAX 6845 – Tax Planning & Consulting (October 19) Topic: Retirement savings and deferred compensation updated: October 10, 2010 I. Planning for retirement A. There are three legs on the retirement stool: Social Security, pensions and personal savings. According to an Employee Benefit Research Institute (EBRI) study, one of those legs, Social Security, is a bit wobbly, providing on average only 40 percent of the income needs of retirees. In addition, here are some numbers regarding the U.S. budget & unfunded liabilities to think about: U.S. unfunded liabilities Amount Social security liability $14.6T Prescription drug liability $19.3T Medicare liability $76.8T Total $110.7T Note: This doesn’t include the current $13.5 trillion national debt. B. For pre-retirees, this is a wake-up call. According to the EBRI study, pensions and annuities account for about 20 percent of income for the over-65 population. This percentage may decline as companies begin to terminate and/or cut-back on their pension plans and governmental entities try to rein in some of the generous pension benefits that have been promised to public-sector employees. People over 65 will need to rely on earnings and personal savings to meet nearly half of their retirement income needs. It's a scary thought, but one that needs to be confronted. The key variable – start planning for retirement early in life. However, this is much easier said than done. C. Some things to think about during your lifetime: 1. Mid-30s to early 40s: • Take full advantage of any employer’s 401(k) match. You could earn 50% to 100% on your money before taking on any market risk. • Boost your 401(k) contribution. As your paycheck grows, your savings rate should too. • Find other tax-advantaged ways to save. Already maxing out on your 401(k)? If you make less than the income limits check out a Roth IRA. • Cover six months of expenses. Make sure you've got an emergency stash of cash, so if you get laid off you won't be forced to dip into your retirement accounts (401(k) and IRAs). • Invest for growth. Put most of your retirement savings – 80% or so into stocks and get ready for a wild ride. 2 2. Mid-40s to early 50s: • Rebalance your portfolio. Periodically reset your holdings in stocks and bonds back to your desired mix to smooth out the market's bumpy ride. • Go over your investment strategy. You still need to invest for growth, but now's the time to start gradually dialing back your stock exposure to guard against another downturn. • Make any catch-up contributions. The extra $5,500 you can add to your 401(k) starting at 50 will grow surprisingly fast. You can also contribute an extra $1,000 a year into an IRA starting at 50....
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