Retirement planning: what to do now, and why

By Michael Matty, CFA, CFP, Chief Investment Officer, St. Germain Investment Management Special to PRIME Retirement is expensive. In fact, for most people, the costs of retirement will be greater than any other savings goal they incurred prior to retirement (saving for college, houses, etc.). And by definition, retirement is usually simultaneous with a cut in income. So you have to be ready when it happens. So what can you do now to get in better shape? Max out your 401(k) contribution Most people have a 401(k), (or other qualified plan for your retirement) available from their employer. You can typically put aside fairly decent amounts ($15,000 to $20,000 annually depending on your age). This should usually be the first place you should look to save for retirement. Why should you make your 401(k) your top priority? First, your employer will typically match a good portion of your contributions. This is like giving up 'free money' if you are not at least contributing up to the matching amount. Second, because the money is pre-tax, it will help cut your tax bill next April. And finally, the ease of having it taken out of your paycheck directly means that you no longer need to think about it. If you never had the money, you can't spend it. So for most people, this is the best place for them to set retirement money aside. If you are not doing this, start now. Contribute to an IRA Once you have maxed out your qualified plan with your employer (and gotten all the 'free money' you can), look into making IRA contributions. While you can 'only' put aside $4,000 ($5,000 if you are over 50), the contributions can still add up significantly over time. Why contribute to an IRA? If you are eligible to make pre-tax contributions, you get to cut your tax bill for next year. In fact, you have until April 15th to make contributions for last year. An eligible 55-year-old can make a $5,000 contribution for last year, $5,000 for this year, and get an additional $10,000 in their IRA. So it really can add up. In addition to the tax benefit today, the IRA will continue to grow tax deferred. What does this mean? Not only does an eligible taxpayer get a deduction this year, any growth in the funds is not taxed until you take the money out of the IRA. Roths and non-deductible IRAs What if you are not eligible for a tax deductible IRA? A Roth IRA may still suit you (if you are eligible). And if you are not eligible for the Roth IRA, a non-deductible IRA may still make sense for you (due to the tax deferral of the growth). Or maybe a non-qualified plan is the only way to achieve a financially sound retirement. Sound confusing? See the next 'to do' item! Get a plan together Maxing out your 401(k) may be confusing if you don't know which investment choices to make. The same goes for contributions to an IRA, or even choosing which type of IRA is right for you. While almost anything you do is better than doing nothing, it helps to have a plan. This may involve sitting down with your accountant, a financial planner, or other investment professional. Why does a plan help? Imagine two truck drivers. Both know they will get from here to California if they drive west, into the setting sun. But the one who has a map will do a much better job at knowing where they are, how much further to go, and the best way to get there. It's similar to a financial plan. A good plan will give you an accurate assessment of where you are (current assets), where you are trying to go (your goals), and lay out a framework to get there (savings recommendations and which investments to put them in). The plan will get you focused on what you need to do to reach your goals. This is important, because like the truck driver, you know there will be minor detours and potholes along the way. But keeping your mind focused on the final destination makes it easier to handle them. The bottom line? Start now. Max out your 401(k). Get an IRA. And get a plan. It will make the expense of retirement a whole lot easier to handle. Column provided to PRIME by: St. Germain Investment management; 1500 Main Street, Springfield, MA. Phone is 413-733-5111 or 1-800-443-7624. web site: www.dgstgermain.com