Investment basics Taxes and retirement

Fixed annuities

Think income Protect what you saved Consistent growth

Getting ready to embark on a new chapter in your life can be very exhilaratingand a little scary. You probably don't need to be reminded that golden years are more expensive than ever because you could live a very long time after retirement - 15, 20, 30 even 40 years more. If you're really ready to retire, then you should shift your focus from accumulating retirement money to managing and maximizing your retirement income.

How much retirement income will you need?

Click here for a calculator that tells you how much you need to put away each month to maintain your current lifestyle in retirement.

An easy rule of thumb is that you'll probably need to replace 70%-90% of your pre-retirement income. If you make $50,000 a year (before taxes) you might need $35,000 - $45,000 a year in retirement income to enjoy the standard you had before.

Your three sources of retirement income

You'll be pulling money from three sources during your retirement years: Social Security, personal investments and your employer plans. Since Social Security was never meant to fully fund your retirement and employer pension plans are becoming a thing of the past, you are one of your greatest sources of retirement income.

Source: Social Security Administration, 1998

The Social Security Administration mails statements to workers aged 25 and older showing an estimate of retirement benefits. Call (800) 772-1213 to request a free Personal Earnings and Benefits Statement.

Social Security

Social Security is still an important source of income. Just how much you get depends on how much you made during your working years. In 2000, the maximum monthly benefit for an individual was $1,433 and $2,149 for a couple.

You can begin collecting benefits the first full month you turn age 62. But taking your benefits early could reduce your benefits by as much as 30% over your lifetime.

Keep in mind that the age you can begin taking full retirement benefits is rising. If you were born before 1938, you'd receive full benefits at the age of 65. If you were born in 1938 or later, you'd have to wait as long as the age of 67. See graph for details.

	Year of Birth Full Retirement Age 1937 or earlier 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943-1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 *Persons born on January 1 of any year should refer to the previous year. Source: Social Security Administration, 2001

Personal investments and retirement accounts

Most experts will tell you the best plan is to take income from a blend of sources instead of liquidating one investment first. So, you might take a portion from your retirement accounts and then take interest on your taxable investments. But you should ask your tax adviser for help regarding your own personal situation.

Annuity income

When selecting your payout structure, consider: Current age and health Family history of longevity Other sources of retirement income Inflation

If you have an annuity, you'll probably want to wait to begin taking income until you're already retired and at least aged 59 = (so you don't face tax penalties). When you take income from an annuity, or "annuitize," you are basically trading the value of your contract (principal and earnings, minus withdrawals) for the insurance company's guarantee to make payments to you for a certain period or for your lifetime. This guarantee is based on the claims-paying ability of the insurance company.

Employer plans

If you're lucky enough to have an employer pension plan or 401(k), you have several options to manage your money when you retire:

	Leave your plan with your employer Not all employers allow you to do this. But if your employer does, be sure the investment options available match your investment objectives. Take a lump-sum distribution If you do this, you'll probably face stiff taxes (even penalties if you're under age 59 =). Roll it directly into an IRA Just ask your employer to send a check directly to the financial institution where you are setting up an account.

When you invest in retirement accounts, be aware of the following tax rules:

Your expenses will change once retired.

You will probably be spending your money differently once you retire. You may decide to sell your home, so you will either lower or remove your mortgage payment or rent from your budget. You won't have to pay for dry cleaning and daily lunches. Hopefully the kids are on their own and done with their educations. Plus, you might be in a lower tax bracket.

You'll have more time to spend on entertainment and travel. But you'll probably have to put more money into healthcare expenses.

Decreasing Expense		Increasing Expense
	Mortgage payments Job-related expenses Taxes Cost of education		Healthcare costs Travel Entertainment

A final word-protecting your assets.

Once you've grown your money, you have to find a way to protect it. In fact, one of the biggest concerns retirees have today is protecting assets from long-term care expenses. There is a good chance that you may need to pay for nursing home, assisted living or home healthcare one day. In fact, more than half of the U.S. population will require long-term care at some point in their lives. 1

Unfortunately, this kind of care can be expensive. The average nursing home costs range from $40,000 to $80,000 each year. 2

	Retirement Vehicles
	What is a fixed annuity? A fixed annuity is a contract issued by an insurance company. You can set aside money to have it grow on a tax-deferred basis for your future use. When you are ready to retire, you can withdraw money as needed, or turn the value of your annuity into a regular income stream that is guaranteed by the insurance company to last the rest of your life, regardless of how long you live. For more information, click here. What is a mutual fund? It's an instrument that invests in many types of stocks, bonds and cash or a combination of all three. With a mutual fund, you can spread your risk among several investments, versus just one stock. What is long-term care insurance? Like other insurance, you pay a specified amount of money (premium) to help offset the risk of larger expenses. You pay this premium so that if and when you need long-term care, you will receive a daily benefit to cover specified care in a nursing home, assisted living facility or at home. Instead of purchasing a large benefit amount of $250,000 for example, you pick a daily benefit amount which can range between $50 and $300. 2