Retirement Planning

The average person should save between 10-15% of their pre-tax income. (That's your salary, not your take-home pay.) Determining exactly how much to save at various points in your life will depend on a few things:

• How old you are, when you plan to retire, and how long you expect to live.
  
• How much you already have saved for retirement.
• How much high-rate debt you have.
  
• What your expected rate of return is.
  
  

Use our Retirement Savings Calculator to help you calculate a savings plan to meet your goals. Play it on the safe side and plan to live until at least age 95. After all, those last few years of life can get expensive, so even if you don't live that long, the extra savings will help meet any additional care needs.

Consider how much high-rate debt you currently have and how long it will take to pay it off. What will that debt cost you in interest charges? Determine if it would be more financially beneficial to turbo-charge those payoffs or consolidate to a low-rate loan before increasing your retirement contributions to 15%.

Your expected rate of return will have a huge impact on the growth of your retirement savings. Be careful not to overlook this detail and assume a rate that is unrealistic for your particular retirement plan. Use our Retirement Savings Calculator to plug in different rates and understand the impact. Higher interest rates are associated with higher risk, so consider what types of investments you will be comfortable in. In any case, it's always better to err on the conservative side. You'll need to estimate the average rate of return for your pre-retirement and post-retirement years.

Remember, the closer you get to retirement, and certainly once in retirement, the less risk you should take with your investments. Therefore, in many cases, you should expect a lower rate of return during post-retirement years.

Be sure to revisit this area of calculation often. As the economy changes, so will your rate of return. You may need to compensate by saving additional funds to meet your goals.

One of the primary considerations in your retirement plan should be how to reduce the amount of income tax you will be subject to. The government has defined a number of retirement accounts and plans, each with their own limits and tax implications. You've probably heard of the most common ones — 401(k) or Traditional and Roth IRAs. Your employment will determine which plans are available to you, and it's important to understand they affect your bottom line.

Tax Now or Tax Later

The basic principle behind the government retirement plans is when you pay tax.

Traditional IRAs allow you to contribute pre-tax dollars. That means you get a tax deduction now on your contribution amount and defer paying tax until you withdraw the money during retirement. Many 401(k) plans also work this way.

Roth IRAs require you to contribute after-tax dollars. That means you've already paid the annual income tax on the money you contribute. The funds than grow tax-free and you don't have to pay any income tax when you withdraw the funds later in life. Roth plans are growing in popularity as people realize the bottom-line benefits over the long term for the early investor. Some companies are even offering Roth 401(k) Plans.

Stocks, Bonds & Insured Funds

Once you understand the tax implementations of your options, consider what your funds will be invested in. Most 401(k) plans offer select options of mutual funds, which are basically managed groupings of stocks and bonds. You should be able to make selections to accommodate your risk tolerance and retirement horizon. If you are managing your own portfolio of IRAs or working with a financial advisor, you can create a more custom portfolio of stocks, bonds and other investment vehicles.

If you want to eliminate all risk for ever loosing any funds, look to insured Share Certificates or annuities for all or some of your retirement portfolio. For the short-term accumulation of retirement funds, use an insured IRA Savings Account.

Funding Your 15%

Most likely your contributions won't all go to the same place. Here's one recommendation on how to prioritize where to invest the 15% of your income that will be for retirement.

1) Company Matching. If your company offers matching, max that out in what every account they offer. That's free money.

2) Fund a Roth IRA. If you're not already contributing to a Roth IRA with the company match, then set one up and max it out up to your total 15% contribution. (Make sure you are within the income limits.)

3) Go Back to the Company 401(k) or Traditional IRA. If you still haven't reached your 15%, but you've hit the Roth IRA contribution limit, increase your contribution to your company retirement fund or open a Traditional IRA.

Be sure to consult your tax advisor to insure you are following the contribution and income limits. They can change from year to year.