1. WEALTH CARE KIT
SM
Retirement Planning
A website built by the National Endowment for Financial Education dedicated to your financial well-being.

2. “
W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
The headlines if not longer. For some, retirement
paint a grim
can last almost as long as their
working years, particularly if they
MANY FACTORS ACCOUNT
picture—
retire early or joined the workforce
late in life. Assuming good health,
FOR CHANGES IN
their retirement years are likely
RETIREMENT PLANNING,
“Most Americans Ill-Prepared for
Retirement.” “Retirees Face Cloudy
Sunset.” “Social Security May Go
Broke by 2041.”
While elements of the truth may lie
BUT TWO STAND OUT:
INCREASED LIFE
EXPECTANCY AND
INFLATION.
“ to be more active than those of
previous generations, often
requiring still more money.
The impact of this increase in
retirement years wouldn't be nearly
so powerful if it wasn't for these
behind these headlines, don’t be
significant factors: the diminishing
discouraged. Chances are good that
number of pensions available
you’ll have a financially comfortable
today, the steady increase in health-
retirement if you start planning confident that Social Security and
care costs, and inflation. While
adequately today. Medicare will continue to provide
inflation —commonly referred to as
benefits equivalent to those
First, let’s look at some of the the rise in the cost of living—has
received today.
facts behind the headlines: been low in recent years, it has the
• According to a recent national • Americans say they are counting potential to increase in the future,
survey, more than half of American on money from savings perhaps just as you are about
workers report that they are saving and investments as retirement to enter retirement.
for retirement, yet of those, the income, yet the personal saving
What do these factors mean
majority has saved less than rate in the U.S. was less than 2
for your efforts to have your Golden
$50,000, and almost one-half of all percent in 2004, a very low rate.
Years be truly golden? More than
workers have saved less than
• Fewer and fewer companies are ever before, you must take charge of
$25,000 toward retirement.
providing traditional pension your retirement future. Especially
• About 40 percent of those plans (guaranteed monthly pay- important is to strengthen your
surveyed report that they have ments, usually based on pay), personal savings, and investments.
calculated how much money they but many of these businesses are
will need to save by the time they providing alternatives, such as GETTING STARTED
retire, but their calculations often 401(k) plans. Such plans depend So where do you start? Retirement
do not include a realistic estimate on annual employer and employee planning is a complex and critical
of how long they will live in contributions and the performance aspect of financial planning.
While you can and should take
retirement or how much they can of the invested assets.
charge of your own retirement
count on Social Security.
destiny, you may need professional
CHANGING DEMOGRAPHICS assistance along the way for such
• Social Security makes up less AND LIFE EXPECTANCY things as investment advice. As you
than half of the retirement needs Many factors account for these near retirement, advice on the tim-
for the majority of Americans. and other wrenching changes in ing of retirement distributions to
For example, assuming you retirement planning, but two stand avoid penalties and minimize taxes
maintain the same lifestyle out: increased life expectancy can be crucial. A financial planner
expenses, Social Security would and inflation. can help you assess where you are,
provide roughly 40 percent of your where you want to go, and how you
retirement income. As little as a generation ago, people can get there. But first, familiarize
didn’t expect to live much beyond yourself with the following five
• The average Social Security the normal retirement age of 65. steps—the same steps the planner
benefit was $950 per month in Today, a person living to age 65 will take in greater detail—and fill
2005. Many workers are not can expect to live another 20 years, out the simplified chart at the end
of this section.
1 © 2001, 2005, 2009
National Endowment for Financial Education

3. “
W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
1. Set your retirement goals. 4. Estimate how much you’ll
This may not be easy if you are need to save to fund your
many years from retiring, but retirement. Subtract your annual
give it a try anyway. What kind of Social Security estimate and any
retirement do you envision? Exotic MORE THAN other inflation adjusted retirement
travel? Puttering in the garden? EVER BEFORE, income sources from your annual
Starting your own business? Part-
time work? Early retirement?
Selling the house and moving to a
warmer climate? Spending time
with your grandchildren?
Volunteering?
YOU MUST TAKE
CHARGE OF YOUR
RETIREMENT
FUTURE.
“ retirement income needs. The
difference is what you must fund out
of your investments and any
employer-sponsored savings plans.
After considering the amount you’ll
get from other investments and
pension benefits (which you can
2. Estimate annual retirement estimate based on information
expenses. While it is best to seek from your current company’s
a financial professional’s help with employee benefits/personnel officer
calculations, a very rough rule of of your retirement income, forcing and/or from past employee
thumb for maintaining your current your investments and personal records), compare your financial
lifestyle in retirement is that you savings to make up the difference. resources to your retirement income
will need 80 to 100 percent of your needs (see the chart at the end of
present income, adjusted upward Every year, you should receive
an estimate of your Social Security this section).
for inflation each year during
retirement. While some costs, such benefits from the Social Security
Administration. (If you don’t, call 5. Make adjustments. If current
as income taxes and housing (if your and projected resources won’t
house is paid off), may decline, 1-800-772-1213.) The Personal
Earnings and Benefit Estimate provide the necessary income, you’ll
others, such as health care and need to make adjustments. Options
travel, are likely to rise. The lifestyle Statement will show your earnings
records, your work credit, and an include saving more by increasing
goals you listed in Step 1 and current income or reducing
the costs associated with them will estimate of benefits. You also can
request this information by visiting expenses, increasing the return on
have a lot to do with estimating your investments, selling your home
your future expenses more precisely. www.ssa.gov. For information
on your pension plan, talk to your when you retire, working part time
When looking at your own finances, during retirement, retiring later, or
consider a broad spectrum of retire- company’s benefits specialist/per-
sonnel representative. lowering your projected standard of
ment issues. living during retirement.
Be sure to plan well beyond What is the current total value
age 65. As mentioned on page 1, if of your taxable and nontaxable OTHER RETIREMENT
your lifestyle costs $45,000 at age savings and investments that you CONSIDERATIONS
45, you’ll need over $98,000 at can devote to retirement, including The high cost of health care is a
age 65 to stay even with four percent employer-sponsored retirement concern for many people facing
inflation. By age 75, you’ll need plans? If you have a defined contri- retirement. Medical expenses can
almost $117,000 a year, assuming bution plan, project the average destroy the best of retirement plans.
only 80 percent of your pre- return of investments in your Medicare, which covers hospitaliza-
retirement income level and account to determine how much tion and doctor’s fees, generally
4 percent inflation! personal savings you will have provides slightly over half of the
accumulated by retirement age. health-related costs of people age 65
3. Determine potential Then project how much income and over. Private Medigap insurance
resources. Calculate the amount of you can realistically expect from can help supplement the govern-
income that Social Security and your your plan. Are there other potential ment program.
pension plan (if any) will provide in resources, such as an inheritance,
today’s dollars. But, while Social a business you will have an interest Medical care is of special concern if
Security adjusts annually for infla- in or sell, or rental property? you retire early, since you won’t
tion, most pension plans do not. Discussing these matters and mak- have access to Medicare until age
Over time, your pension benefits ing rough calculations with a 65. Many companies are reducing or
will make up a declining portion financial planner can help you dropping medical benefits offered to
reach safe retirement ground.
2 © 2001, 2005, 2009
National Endowment for Financial Education

4. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
their early retirees. You may have in property management and will tion plans, such as 401(k)s and
to extend coverage through your reduce probate costs, but will not tax-sheltered annuities/403(b)s
ex-employer’s plan via COBRA save estate taxes. (for employees of schools and
rules, buy private insurance, or nonprofits), can build significant
consider going back to work to get As you can see, retirement planning retirement funds, especially if you
into a health plan. requires consideration of many contribute as much as possible to
Expensive long-term nursing components. Pulling them together them. In many cases, the employer
home care can devastate a retire- mandates careful planning. will match your contributions. Even
ment plan. Depending on the size with this attractive benefit, almost
of the estate and other factors, a fourth of eligible employees don’t
KEYS TO A
financial planners advise many participate.
people to buy a long-term-care
COMFORTABLE
insurance policy to cover some of If you’re self-employed, set up
your own tax-deferred retirement
RETIREMENT
this risk. Working after retirement is
becoming increasingly common as account, such as a Keogh plan,
traditional sources of support, such simplified employee pension plan
as Social Security, become less (SEP), savings incentive match plan
With these steps in mind, here are for employees (SIMPLE), or IRA, and
viable.
a few strategies for making your contribute the maximum amount
possible.
ESTATE PLANNING TOOLS retirement years more financially
A variety of estate planning tools sound.
Take advantage of nondeductible
can be invaluable in protecting education IRAs, nondeductible Roth
your retirement nest egg from PAY YOURSELF FIRST
IRAs, and the liberalized rules for
unnecessary medical, legal, or Even if you’re trying to save
establishing IRAs. See your tax
financial expenses. money for your children’s college
advisor for more details.
A durable power of attorney is a education, a home, or other
legal document which ensures that financial goals, regularly set aside
HAVE A CASH RESERVE
if you can no longer manage your money for retirement. It is best to
Remember, have a cash reserve
financial and personal affairs, a determine a fixed amount to save
set aside, preferably enough to
designated representative, i.e., regularly. Financial planners
cover three to six months of
agent, can act on your behalf. recommend saving about 10 per-
expenses, so that you don’t need
cent per year, depending on your
to dip into your retirement
A living will is a statement of age, other resources, and lifestyle
contributions for extra money and
your personal wishes as to what goals.
pay the penalty associated with it.
life-sustaining medical treatment
While you should check with your
you want or don’t want should you START SAVING
employee benefits/personnel
become terminally ill and comatose. IMMEDIATELY
representative and your tax
Without it, you could end up Start saving immediately! If you
preparer to make sure of penalties
incurring medical expenses and invest $10,000 in a tax-deferred
that would apply, most workers
medical treatment you may account at 8 percent at age 35, it
who take plan distributions prior to
not want. will grow through the power of
retirement face a short-term
compounding to $100,627 by the
A medical durable power of attorney problem: they must pay more
time you retire at age 65. If you
(sometimes called a healthcare taxes. The plan trustee may have
wait until age 50, you’ll need to
proxy) combines the above docu- to withhold 20 percent for the IRS
invest $31,722 at 8 percent to see
ments. In it, you designate a from the distribution. Additionally,
it grow to the same amount by
representative to make medical the 10 percent early withdrawal
age 65.
decisions on your behalf in penalty may apply to those under
accordance with your wishes stated age 59 1/2. This withholding
MAXIMIZE CONTRIBUTIONS
in this power of attorney. problem and any 10 percent early
Maximize contributions to tax-
withdrawal penalty can be avoided
Depending on the size and complex- deferred retirement plans available
by making a direct rollover to an
ity of your estate, revocable trusts to many working people through
IRA or any other qualified
can be a useful alternative to a their employer. It’s the best tax
retirement plan.
durable power of attorney to assist shelter around. Employee contribu-
3 © 2001, 2005, 2009
National Endowment for Financial Education

5. “
W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
INVEST TO BEAT fully. The law imposes special
INFLATION & TAXES restrictions on the amount of
Invest to beat inflation and taxes. lump-sum distributions that may be
This means investing a significant made from a defined benefit plan.
portion of your funds in growth
assets, such as stocks, compared to
WHICH OPTION YOU Therefore, annuity payments
(assuming normal longevity) may be
PURSUE DEPENDS ON
low-yielding CDs. By diversifying
and investing for the long term
(five years or longer), you can
minimize investment risk. When
approaching retirement, many
people move into “safer,” lower-
earning, fixed-income investments.
YOUR NEEDS.
PROFESSIONAL ADVICE
ABOUT THESE ISSUES
SEEK
“ more valuable than a lump-sum
distribution in some defined benefit
plans. Which option you pursue
depends on your needs. Seek
professional advice about these
issues.
However, because retirement DON’T STOP INVESTING
may last 20 years or more, it’s AT AGE 65
important that even retirees keep Don’t stop investing at age 65.
some money in stocks to stay even take advantage of it. Often, if the Remember, you’re likely to have a
or ahead of inflation. company matches an employee’s long retirement.
contribution, the worker makes a
MAKE YOUR TAX-DEFERRED 50 percent gain on his or her DON’T TOUCH
MONEY WORK HARD contribution immediately with Don’t touch your retirement funds
If you have investment control, no risk! except for retirement. Participants
make the money in your tax- often tap their retirement accounts
deferred plan work hard. The CHOSE YOUR to buy a home or to fund their
ultimate size of your retirement BENEFIT CAREFULLY children’s college education, even
account depends on two factors: If you belong to an employer- to buy a car. Of those who receive
the amount of contributions and sponsored retirement plan, choose their pension money in a lump sum
the earnings on those contribu- your benefit carefully when you upon early retirement or when they
tions. Many plans offer investment retire. Typically you’ll have to change jobs, only about one-third
alternatives. Follow the same choose to (1) receive monthly roll it over into an IRA.
investment advice given earlier: payments and pay taxes based
diversify and put a significant Realize the resulting figure is a
on a ratio, (2) withdraw the funds
portion of your money in other rough estimate, which assumes
in a lump sum and pay taxes on
equities (not just in your company’s expenses and income sources do
them, or (3) have the plan trustee
stock). And if your plan allows not increase with inflation. You and
roll the funds over into an IRA to
employee contributions and your planner then can determine
defer taxes, which you then control
company matching, be sure to the amount you must save annually.
4 © 2001, 2005, 2009
National Endowment for Financial Education

6. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
STARTING THE PROCESS
STEP 1
Begin retirement planning by getting yourself ready to talk with a financial professional. Use the simplified chart
that follows.
• Set your retirement goals.
• What do you foresee for your retirement lifestyle? If married, discuss this with your spouse.
• How many years until I/we want to retire?
• Where will I/we live after retirement?
• How many years will I/we be retired?
• What kind of activities and lifestyle do I/we want after retirement?
STEP 2
Estimate annual retirement expenses and your pre- and post-retirement budgets in today’s dollars. Your planner will
adjust these amounts for inflation and help determine if your numbers are realistic.
Now Type of Expense During Retirement
$________________ Housing utilities $________________
$________________ Food $________________
$________________ Clothing, personal $________________
$________________ Entertainment, travel $________________
$________________ Medical, dental $________________
$________________ Car transportation $________________
$________________ Insurances $________________
$________________ Gifts, contributions $________________
$________________ Taxes $________________
$________________ Total (today’s dollars) $________________
STEP 3
Determine potential resources. List your sources of retirement income in today’s dollars. Your financial planner will
adjust them and help you determine if your estimates are realistic.
$/Year
Social Security retirement benefits $________________
Pension or profit sharing from employer(s) $________________
IRA, TSA, 401(k) plans we contribute to $________________
Income from investments shown in Step 4 (below) $________________
Part-time/Full-time work during retirement $________________
Other retirement income (list source):
Total Annual Retirement Income (today’s dollars) $________________
5 © 2001, 2005, 2009
National Endowment for Financial Education

7. W E A LT H C A R E K I T: R e t i r e m e n t P l a n n i n g
STARTING THE PROCESS cont.
STEP 4
Calculate how much you’ll need to save to fund your retirement. List your regular savings and investments that are
earmarked just for retirement. The time value of money comes into play here.
• Every month, I/we save $ in my/our 401(k)/mutual fund/etc., which totals per year.
• My/our retirement investments are worth $ at present.
STEP 5
Estimate annual retirement expenses and your pre- and post-retirement budgets in today’s dollars. Your planner will
adjust these amounts for inflation and help determine if your numbers are realistic.
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6 © 2001, 2005, 2009
National Endowment for Financial Education