Fundamentals Of A Successful Savings Program

The main goal of a successful retirement program is to ensure you will have sufficient financial resources to maintain or improve your lifestyle during your retirement years. According to some financial planning experts, to do so, you will need to save enough so that your retirement income is 70-80% of your pre-retirement income, and you will need a higher percentage if you plan to improve your standard of living. Building such savings requires careful planning, which includes assessing your current assets, the number of years left until retirement and how much you'll be able to save during your pre-retirement years. In this article, we list some of the steps to take when implementing your retirement program.

Take Stock of What You already Have If you are not a financial planning expert or have the time necessary to implement and manage a retirement program, you may need the help of a competent financial planner. If you do go to see one, s/he will need to assess your current financial status in order to design a realistic and successful retirement program. You therefore need to provide detailed information about your financial affairs. Documents your financial planner may need generally include:

• copies of most recent account statements, including regular savings, checking, retirement savings, annuity products, credit cards and other debts
• a copy of amortization schedules or summaries of any mortgages
• copies of your tax return for the last three years
• a copy of your most recent pay stub
• health and life insurance contracts
• a list of your monthly expenses
• any other documents you think may be important to your financial planning process

Ascertain How Much You Will Need for Retirement

One popular approach to retirement planning starts with determining how much you'll need to finance your retirement years. This is usually based on projected cost-of-living increases, the number of years you're likely to spend in retirement and the lifestyle you plan to lead during retirement. But projecting an amount isn't an exact science: the years you spend in retirement may be more or less than you project, and the same may go for cost-of-living increases. However, a comprehensive outlook and some thought will help to provide realistic projections. Here are some factors to consider:

• your projected everyday living expenses
• your life expectancy
• your projected costs
• your resources other than your retirement savings that cover unplanned expenses; such resources may include long-term care insurance, annuity products and health insurance
• your property: if you own your home (i.e. have no outstanding mortgage balance), or will own your home by the time you retire, you have the option of selling it or obtaining income through a reverse mortgage (see The Reverse Mortgage: A Retirement Tool for information)
• your intended lifestyle during retirement: do you plan to lead a quiet retirement or do things like travel around the world and other activities that may be expensive?

Determine What You Need to Save and How
Once you have factored in the above considerations, it's necessary to determine how much you will need to save on your own. First consider the possible sources of income you will have during retirement. A complete retirement income package is commonly referred to as a "three-legged stool", comprising your social security, employer-sponsored retirement plans (such as a qualified plans) and, finally, your personal savings. So, of course, the amount of personal savings you need to achieve depends on the contributions to retirement accounts by your employer and your projected income from social security.

Your next consideration is the type of saving vehicle you use for your personal savings - this will affect your required annual savings. The amount varies depending on whether your means of savings are in pre-tax, after-tax, tax-free or tax-deferred accounts or a combination thereof. They type of savings account you choose depends on - among other things - whether it is better for you to pay tax on your savings before or after retirement.

Saving in a tax-deferred vehicle, such as a Traditional IRA or 401(k) plan, may reduce your current taxable income. If you have a 401(k), your taxable income is reduced by what income you defer to the plan, and if you have a Traditional IRA, you may be able to claim your contributions as a tax deduction. Earnings in such vehicles also accrue on a tax-deferred basis, but the assets are taxed when you distribute them from the retirement account. You may pay less income taxes on amounts saved on a pre-tax basis, if you make withdrawals during retirement and your income tax rate is lower than it is in your pre-retirement years.   

By using post-tax funds to save for retirement, you won't have to pay tax again when you withdraw them during retirement. Unless you use a Roth IRA, however, your earnings on post-tax funds are usually not tax deferred. So when you withdraw these amounts, they may be taxed at your ordinary income tax rate or at a capital gains rate, depending on the type of income and the duration for which you held the investments.

If you are eligible for a Roth IRA, you may want to ask your financial planner whether it is beneficial for you to use one even for only part of your savings. Roth IRAs are funded with after-tax assets, earnings accrue on a tax-deferred basis, and distributions are tax free if you meet certain requirements. (See Roth IRA: Back to Basics and Traditional or Roth IRA… Which is the better Choice?)

Find the Extra Money for Savings
It's one thing to figure out how much you need during retirement, how much you need to save and what account you will use to do so. But the primary challenge is finding the extra funds to put toward savings, especially if your budget is already spread thin. For many, this means changing spending habits, re-budgeting and redefining needs vs wants. (For tips on saving for retirement and identifying sources of assets that can be retargeted for savings, see Making Salary Deferral Contributions as well as Seven Common Financial Mistakes.)

Invest Your Savings
Once you are able to allocate a part of your monthly income to your savings, you need to think about investing those amounts. Investing puts your money to work for you and usually gives you the benefits of compound interest. Investing is integral to ensuring your retirement program meets your goals. And the earlier you start, the easier it will be for you to do so.

The types of investments that are suitable for your portfolio will depend primarily on your risk tolerance. Generally, the closer you are to your targeted retirement date, the lower your risk tolerance will be. The idea is that those who have a longer time until retirement have more opportunity to recoup any losses that may occur on investments. So someone who is in his/her early twenties may have a portfolio that includes more high-risk investments such as stocks. Someone who is in his or her sixties, on the other hand, will have a higher concentration of investments with guaranteed rates of return such as certificate of deposits or government securities.

Regardless of risk tolerance, it is important to achieve an appropriately diversified portfolio, one that maximizes return for its determined risk. (For more on asset allocation, see Five Things To Know About Asset Allocation and Asset Allocation Strategies. If you are new to investing, check out Investing 101.)  

Choosing a Financial Planner
If you do not already have a competent financial planner, or you are shopping for a financial planner, it's important to shop around. See Choosing an Advisor: Wall Street Vs Main Street  for some tips on selecting a financial planner. (See also Shopping For A Financial Advisor and for some general information on financial planners and their responsibilities, see Dispelling The Myths Surrounding Financial Planners.)In addition, be sure to check the background of the financial planners that you plan to interview. For tips on checking the background of financial planners, see the U.S. Securities and Exchange Commission's article Protect Your Money: Check Out Brokers and Advisers.  

Conclusion
This article discusses some of the fundamental groundwork for ensuring your retirement program is successful - but this is only an overview. The underlying details will take time and effort for you to determine and execute. And the steps we outline above do not make up a catch-all solution. Your financial planner should be able to help ensure that all important factors are considered. In the meantime, don't be afraid to conduct some research on your own, by visiting websites, such as the U.S. Social Security Administration, which provides useful information and calculators for retirement planning.

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.