THE WARNEKE GROUP, LLC

typically focused on saving enough to guarantee minimal survival for a relatively brief period of time.

More recently, however, many individuals are beginning to recognize that for a number of reasons, this traditional view of retirement is no longer accurate.  Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s.  Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65.  And, many retirees do more than just rock on the front porch.  Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports.

This changed face of retirement, however, with all of its possibilities, does not happen automatically.  Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, however, these needs can be met.

Common Retirement Planning Issues

Planning for a much longer life span involves addressing problems not faced by earlier generations.  Some of the key issues include the following.

Paying for retirement: Providing a steady income is often the key problem involved in retirement planning. Longer life spans raise the issue of the impact of inflation on fixed dollar payments, as well as the possibility of outliving accumulated personal savings.  Social Security retirement benefits, and income from employer-sponsored retirement plans typically provide only a portion of the total income required.  If income is insufficient, a retiree may be forced to either continue working, or face a reduced standard of living.

Health care: The health benefits provided through the federal government’s Medicare program are generally considered to be only a foundation.  Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare.  Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual’s wishes

when no hope of recovery is possible.

Estate planning: Retirement planning inevitably must consider what happens to an individual’s assets after retirement is over. Estate planning should ensure not only that assets are transferred to the individuals or organizations chosen by the owner, but also that the transfer is done with the least amount of tax.

Housing: This question involves not only the size and type of home (condo, house, shared housing, assisted living), but also its location.  Such factors as climate and proximity to close family members and medical care are often important.  Completely

paying off a home loan can reduce monthly income needs.  A reverse mortgage may provide additional monthly income.

Lifestyle: Some individuals, accustomed to a busy work life, find it difficult to enjoy the freedom offered by retirement.  Planning ahead can make this transition easier.

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Social Security retirement benefits are intended to provide only a portion of an individual’s retirement income.  Traditionally, retirement benefits began at age 65.  For those born after 1937, however, normal retirement age, when full retirement benefits begin, will increase gradually, until it reaches age 67 for those born in 1960 and later.  A reduced benefit is available, beginning at age 62.  The monthly benefit amount is based on an individual’s past earnings record.  A worker can earn a larger retirement benefit by continuing to work past normal retirement age.  Up to 85 percent of a retiree’s Social Security retirement

benefits may be taxable as ordinary income.  Retirement benefits are adjusted for inflation on an annual basis.

A retirement plan is considered to be “qualified” if it meets certain requirements set by the federal government.  In general, employer or employee contributions to a qualified plan are currently deductible and the earnings are tax deferred until paid out of the plan.  Mandatory distribution rules typically apply and withdrawals before age 59½ may be subject to an additional 10% penalty tax.¹

Employer-sponsored qualified plans: Employer-sponsored plans can generally be classified as either defined benefit or defined contribution.  Defined benefit plans specify the benefit amount a participant will receive at retirement; an actuary estimates how much must be contributed each year to fund the anticipated benefit.  The investment risk rests on the employer. Benefits are generally taxable.  Defined contribution plans, such as 401(k), 403(b) or SEP plans, typically put a percentage of current salaries into the plan each year.  The retirement benefit will depend on the amount contributed, the investment return and the number of years until a participant retires.  The investment risk rests on the participant. Benefits are generally taxable.

Individual qualified plans: Include the traditional individual retirement account (IRA) and the Roth IRA.  Contributions to a traditional IRA may be deductible and earnings grow tax deferred.  Distributions from a traditional IRA are taxable to the extent of deductible contributions and growth.  Contributions to a Roth IRA are never deductible and earnings grow tax deferred.  If certain requirements are met, retirement distributions from a Roth IRA are tax free.

Nonqualified retirement plans: An employer may set up a plan, often in the form of a deferred compensation plan, which does not meet federal requirements to be considered “qualified.”  Benefits are generally taxable when received.  Such plans are often used as a supplement to qualified retirement plans.

Individual savings and investments are the third primary source of retirement income.  An individual can choose to accumulate funds using a wide range of investment vehicles.  The appropriate type of investment will depend on a number of factors such as an individual’s investment skill and experience, risk tolerance, tax bracket, and the number of years until retirement.  Below are listed some of the more commonly used choices.

Savings accounts: Including regular savings accounts, money market funds and certificates of deposit (CDs) at banks, savings and loans and credit unions.

Common stock: May also include other forms of equity ownership such as preferred stock or convertible bonds.  Stock can be owned directly, in a personal portfolio or indirectly through a mutual fund.

Bonds: Includes corporate, government or municipal bonds.  Bonds can be owned directly, in a personal portfolio or indirectly, through either a mutual fund or unit investment trust.

Real estate: Individually owned investment real estate or indirect investment through a real estate investment trust or limited partnership.

Precious metals: Such as gold or silver, in the form of coins, bullion or in the common stock of mining companies.

Commercial deferred annuities: Commercial, deferred annuities are purchased from a life insurance company and can provide tax-deferred growth through a variety of investment choices.

Continued employment: On either a full or part-time basis. Wage and salary income is usually taxable and before-normal-retirement-age² earnings above a certain level may affect the amount of Social Security retirement benefits received.

Home equity: If a home is completely paid for, a reverse mortgage may provide additional income, without giving up home ownership.

¹ The rules and regulations surrounding qualified plans are complex. This discussion is intended to be only a brief, general description. State or local law may vary.

² “Normal retirement age” is the age at which an individual is entitled to “full” Social Security retirement benefits – 100% of an individual’s Primary Insurance Amount. Under current law, this age will vary from 65 to 67, depending on an individual’s year of birth.