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November 2006
Index of all
past
Affiliate Corner columns
Sail towards retirement with proper financial planning
By Bert Hermelink,
CLU, ChFC, RFC, CSA
Strategic Advantage Financial
As the baby boomers approach retirement, statistically, over half may not be prepared financially for an extended retirement.
The crux of the problem is our increasing longevity. If we retire at full social security at age 66 or 67, we probably need to provide income for 20 to 30 years, with provision for inflation, medical expenses and long term care needs, etc. Experts estimate that we will need at least 80 to 90 percent of our pre-retirement income to start; that need may increase with time.
Without serious discipline and planning, many of us will face major problems. Fortunately, we have tax-advantaged savings vehicles like IRAs, Roth IRAs, Simple IRAs, SEPs, 401(k)s, Roth 401(k)s, Individual 401(k)s and Individual Roth 401(k)s. Since most of us are self-employed, it’s up to us.
For the self-employed individuals with no employees, the IRAs, SEPs and “indie 401(k)s” are tools we can use to prepare for our “golden years.” IRAs are the basic retirement plans. Under age 50, you can contribute $4,000 per year; those 50 and over can contribute $5,000 per year.
For people nearing retirement, and/or earning larger incomes, SEPs and Individual 401(k)s allow for much larger contributions. A SEP (self-employed pension) allows you to put away 20 percent of your income to a maximum of $44,000 per year ($49,000 if you’re 50 or older.). An Individual 401(k) is usable if you have no employees other than your spouse, and allows the same maximum contribution.
The “indie K” differs from the SEP in two ways:
1. It allows for loans.
2. The first $15,000 (for those under 50) or $20,000 (for 50 or over) allow for “voluntary deferrals.” You could contribute 100 percent of your first $15,000 or $20,000 of income, and 20 percent of the rest, up to the plan maximum.
To max-contribute to a SEP requires $220,000 or $245,000 income; for an “indie K,” it’s $160,000 or $165,000. These contributions are tax-deductible; the income in retirement is taxable. Roth contributions are not deductible; the income is not taxable.
The investment choices are many. The key is that the assets be invested in a manner consistent with the person’s risk tolerance, goals, and individual situation (age, family needs, overall assets, and special needs, etc.). Since over 91 percent of the success of an investment portfolio is determined by the allocation among different asset classes with the goal being to maximize the return consistent with the level of risk accepted, a skilled financial advisor is a valuable ally.
Any U.S. federal tax advice contained in this communication is not intended to be relied on. Please check with your own tax advisor.
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