Assessing your retirement goals

Investing for retirement is probably one of your most critical financial goals. Yet many of us do not have an adequate understanding of how much income we will have or need during our retirement, even if we participate in a 401(k) plan or other retirement investing program.To help Americans work toward a financially secure retirement, the Social Security Administration annually mails statements to all working Americans over the age of 25 who have contributed to the Social Security program. These statements provide an estimate of current and projected Social Security benefits.Your projected annual benefit is shown at age 62 (early retirement), at full retirement age (which increases gradually from 65 to 67 for those born after 1938) and at age 70 (postponement of benefits). The statement also lists the Social Security taxes that have been paid on your behalf as well as your employment earnings to date. Typically, your statement will arrive about three months before your birthday.Use the Social Security information in the statement to help assess your retirement needs. Keep in mind that we are living longer, healthier lives. As a consequence, you have to consider funding a retirement that could last for 20 or more years. Many financial professionals estimate that you will need between 70 percent and 80 percent of your gross annual income each year to maintain your current lifestyle during retirement, making it clear that Social Security alone will probably not be enough. But Social Security was never meant to be the sole source of income in retirement. A general rule of thumb has developed that a comfortable retirement is based on a “three-legged stool” of Social Security, pensions and savings.The IRA advantageMaking annual contributions to an Individual Retirement Account is a simple and convenient means of accumulating additional funds for retirement.Today most working Americans have the opportunity to contribute up to $5,000 to a tax-favored IRA for 2009. In addition, if you are age 50 or over, you may contribute a catch-up contribution of $1,000, bringing the total to $6,000 for 2009. Depending on certain income requirements, you and/or your spouse may be eligible to deduct traditional IRA contributions or to establish a Roth IRA. The Roth IRA may provide you with tax-free income under certain circumstances.Regardless of the type of IRA, all investment earnings and gains in an IRA accumulate on a tax-deferred basis, which means you pay no current income taxes on account earnings until they’re withdrawn. If certain conditions are met, the earnings in a Roth IRA are not taxed on withdrawal. (Withdrawals before age 59-1/2 may incur a 10 percent federal penalty tax.) Over time, this tax deferral could have a powerful effect on the value of your IRA account.Secure your retirement by reviewing your Social Security statement and by contributing to your IRA. Discuss your retirement income objectives with your financial adviser. Together, you can determine which of the many investment vehicles available are appropriate for your individual needs.
Donald E. Sommese, first vice president and financial adviser based at the Manchester office of Morgan Stanley Smith Barney, can be reached at 800-726-6141.