Even if you don’t want the money.

If you don’t take the RMD, you will find yourself hit with an excise tax. So, while you do need to remember that you cannot withdraw from most tax-advantaged retirement plans until you are 59.5, you also need to plan for the fact that at some point you have to begin taking RMDs.

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Retirement Issue: Required Minimum Distributions

Interestingly, though, the rate cut, and other moves to help build “confidence” in the market (like the bond insurer bailout) could help those with investment retirement account like 401(k)s and IRAs. Unfortunately, many people still don’t realize the importance of these tax-deferred retirement accounts. Country Insurance & Financial Services found the following about tax-deferred retirement accounts:

Americans’ admission to their lack of awareness is on target, as half of those surveyed could not name a tax-free or tax-deferred investment.  The right answer – 401(k) or an IRA – was selected by only 50 percent.  Further, more than one-third (36 percent) currently do not have an IRA or 401(k) account.

Investment diversity is an important thing, especially in uncertain economic times like these.  I would consider tax-deferred retirement accounts for some of your retirement investments.

Post from: EveryJoe

Tax-Deferred Retirement Accounts

Focus on Your Goals to Achieve Retirement Readiness

By Mark J. Smith, CFP^®, CPA/PFS, CIMA^®

At M.J. Smith and Associates, we have observed that many times people fail to properly plan for their financial retirement needs because they focus exclusively on money. But retirement goals aren’t just financial. Knowing the lifestyle you want to live during retirement is the beginning of a successful wealth management plan. Do you want to tour the country in an RV, live in a house on the beach, or move closer to your children and grandchildren during retirement?

Take some time to write down your retirement goals, and share them with your financial adviser so that together you can determine your financial needs to achieve your retirement vision. By starting at the beginning—with your goals—you will ensure a completely customized retirement savings plan. When deciding how to fund the retirement goals you’ve created, please consider the following factors.

Increased life expectancy

Thirty years ago, the average life expectancy was 73 years; however, today the average life expectancy is nearly 80. We need to plan for seven more years of life than our grandparents did.

Inflation

In this country, inflation has increased 2.57 percent in the last seven years. When you retire the cost of living will be higher than it is today, and each subsequent year of your retirement will require more money than the year before to maintain the same lifestyle.

Social Security

You can’t depend on Social Security to sustain you during retirement–even for the necessities of life. We recommend that you develop your plan so that your Social Security checks will be used for things you want, not things you need.

Delaying retirement savings

Waiting to start saving for retirement could hurt you more than you think. If a 25- year-old saves $4,000 per year toward retirement for a 10 year period and has an account interest rate of eight percent annually, when she reaches 65 her retirement account will total $640,120. But if she waits until she is 35 years old and saves the same amount for retirement annually with the same interest rate for the next 30 years, her account will total $408,534 when she is 65. Waiting 10 years to start saving for retirement causes a loss of over $200,000 in this case, even though she saved for 20 extra years! This is a hypothetical illustration and is not intended to reflect actual performance.

Mortgage vs. savings

Our parents and grandparents spent their lives paying down their mortgages so they could own their homes. But today, because of the compounding nature of a liquid investment portfolio as compared to the equity in your home, you may ultimately net more money by saving first than you would if chose to pay off your home and save afterward. We recommend that your net worth consist of approximately 25 percent in home equity and 75 percent in retirement savings, at least until your total retirement needs are funded.

Retirement cash flow

Cash flow is a major retirement concern. Make a list of things you will need in retirement, such as housing, food, clothing, insurance, transportation and healthcare. Then make an additional list of things you want to have in retirement, such as a second home, travel, entertainment, and donations to charitable causes. So that you enjoy your retirement lifestyle, you should plan to fund at least some of the things you want, in addition to all of the things you need.

In addition to the issues mentioned here, other factors may contribute to when you can retire, including what investments you have made, the stability of your investments, and the sequence of your investment returns. Please contact your financial advisor if you have questions about your retirement planning.

Mark J. Smith is a Certified Financial Planner™ practitioner, a Personal Financial Specialist, a Certified Investment Management Analyst, and a Certified Public Accountant. In 2007 he was named one of the top 10 financial advisers in the U.S. by Registered Rep magazine; Barron’s named him the top-ranked independent adviser in Colorado. M. J. Smith and Associates offers fee-based services with a comprehensive financial planning approach which includes income tax planning.

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Guest Post: Other Factors of Retirement Planning

Reverse mortgage

The reverse mortgage is kind of what it sounds like. You structure a home equity loan so that the bank makes mortgage payments to you. The money still has to be paid back, but it doesn’t happen until the home is sold. And the payback (interest included) is made with the proceeds from the sale of the home.

Formerly, you had to be at least 62 to take advantage of the reverse mortgage. Now, however, at least one company is offering a reverse mortgage to 60-year-olds. And I have a sneaking suspicion that if more and more people want to retire early with the equity in their home to help, that lenders might even go lower.

Post from: EveryJoe

Retirement Planning: Reverse Mortgage

Consider this (especially in light of retirement planning): A Fed rate cut can pave the way to higher inflation. While September’s rate cut was meant to get the economy under control, and maybe provide a boost to the housing market, some analysts are afraid that Wednesday’s cut was overkill. And CNN Money reports on the possible consequences of the latest Fed rate cut:

The Fed’s actions could very well be ushering in a new era of inflation – and that is horrible news for your retirement portfolio.

Your retirement planning has to take this into account

It is important that your retirement planning take this latest personal finance effect into account. And this means diversification. The stock market is still struggling today after yesterday’s dramatic plunge, so it could be a good time to buy. But you can’t rely only on “safer” investments only. Some of your investments (especially if your retirement is a ways off) need to be more aggressive in order to overcome inflation. And you will also need to diversify in terms of sector.

Retirement planning is not a “set it and forget it” option. Every so often you need to review your asset allocation and make the appropriate changes. Because inflation could be coming to reduce the value of your wealth.

Post from: EveryJoe

Retirement Planning: The Fed Rate Cut and Inflation

Catch that bit about “core inflation”? That’s Fedspeak for: inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month.

But as you probably realize, food energy are two things that make up a major part of your budget. Which is why you need to keep inflation in mind. With wages basically stagnant, you should realize that things are going to keep costing more, even as your income remains relatively stable. Living within your means and investing are two ways to outstrip inflation. And it means that you shouldn’t just be reassured by core inflation figures. Occasionally look at what the entire picture is doing, including in areas like energy, food, healthcare and education where costs rise faster than other consumer areas.

Inflation will also affect your retirement planning. Last week we looked at how much one could get if one invested $1 a week instead of playing the lottery. Logan Flatt, CFA pointed out in a comment that the results, though impressive, only showed the nominal amount you would get, rather than the actual value of the money you accumulated:

To get to the real results, you must reduce your annual return assumptions by a further assumed annual rate of inflation for prices in the general economy.

Translation: subtract the amount of money gobbled up by inflation from your yearly gains.

So remember: inflation is real factor when it comes to yielding wealth. Including prudent investments in a diversified portfolio is important so that your earnings aren’t completely swallowed by the monster of inflation.

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Factoring Inflation Into Your Financial Plans

The three-legged stool

Retirement funding is often referred to as the three-legged stool. The three legs are as follows:

• The government, which helps out through Social Security
• Company pension plans, which are becoming scarce
• Your own personal financial health and savings

As you can see, two of the three legs listed above are becoming rapidly shorter. Although company pension plans are being widely replaced by such things as IRAs and 401(k)s. This just means that the stool is morphing into something else entirely. Something that will require you to do more to secure your own future.

Start NOW to build your retirement funds

The fact of the matter is that you need to start immediately with planning for retirement. Try to put the maximum in your retirement account each year (this might be hard to manage if you have a 401(k) that has a higher limit). And, make sure you are doing other things. Build up your assets, whether it’s working toward paying off your home or getting out of debt, or giving your savings a boost through an online savings account or a money market account.

The idea is to chart a course and stick with it, creating a better future for yourself.

Post from: EveryJoe

Planning for Retirement