to Expect from Retirement
Sources of Retirement Income
Information on Individual Retirement Accounts
Information on Keogh Plans
Information on Social Security
Retirement Plan Distributions
The Revocable Living Trust
The Pacific American Retirement and
Financial Planning Analyzer
to Expect from Retirement
wants to retire with adequate resources. Studies have shown
that the five most pressing concerns for the majority of people
who are planning to retire within ten years include the following:
comfortable and financially self-sufficient.
a standard of living equal to the current one.
outliving all available assets.
able to pay all routine and necessary health care costs.
provisions for long-term health care, should the need arise.
most people who plan carefully are able to address these concerns
and comfortably retire on an annual income that is between
70% and 80% of their current annual income.
a better understanding of your own likely financial situation
after retirement, you should closely examine and analyze every
potential source of income. If you are close to retirement
age now, you must do what you can immediately in order to
guarantee that you have adequate resources after your retirement
and for the rest of your life. And even if retirement is still
more than ten years away, the earlier you begin to plan for
life after retirement, the more effective that plan will ultimately
be. To assist you we have created the interactive Pacific
American Retirement and Financial Planning Analyzer.
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of Retirement Income
Security provides approximately 39% of the average individual's
retirement income, and even less for anyone with a higher
income. To find out how much you will receive when you are
eligible, call 1-800-772-1213 and ask for a Request for Earnings
and Benefit Estimate Statement (Form SSA-7004-SM). Once you
receive the statement, look it over carefully and make sure
the earnings amounts shown are correct; you only have three
years to correct any errors.
pension plans usually account for about 18% of the average
individual retirement income. The amount you will receive
from any plan depends on your salary, the number of years
you were with the sponsoring firm, and the size of the firm's
are now offering 401(k) plans that allow employees to save
for their retirement by making tax-deductible contributions
that grow on a tax-deferred basis until retirement. Some employers
make matching contributions to these plans, and if this is
true in your case it is important that you maximize these
matching contributions. Contact your employer's benefits department
to find out what you can expect to receive from any retirement
who are self-employed can make tax-deductible contributions
to most Keogh plans totaling 25% of their gross annual income
and up to a maximum of $40,000, whichever is less. These investments,
like 401(k) plans, also grow on a tax-deferred basis until
Retirement Accounts (IRAs)
not tax-deductible for individuals with higher incomes, but
they still offer tax-deferred growth until retirement. For tax years
2002 through 2004, the maximum combined contribution to a traditional
IRA and Roth IRA is generally limited to $3,000 (if married, up to
$3,000 on behalf of each spouse, even if one spouse has little or no
compensation). For 2005 through 2007, it will be $4,000, and in 2008,
it will be $5,000.
For tax years
2002 through 2005, an individual who will be at least 50 years old by
the end of the tax year is able to make an additional contribution of
$500 to a traditional or Roth IRA. After 2005, the maximum annual
amount of the "catch-up" contribution will be $1,000.
younger individuals should invest in more aggressive portfolios
that include more risk because these investments have a chance
to recover from the occasional drop in value. As you approach
retirement, you may wish to reduce the level of risk in your
portfolio so that market fluctuations do not endanger your
investments when you will most depend on them for income.
plan to continue working when they reach retirement age. While
this is a viable option for some individuals, the various
health issues related to retirement age can sometime make
it impossible for a person to depend on this. Also, any post-retirement
income that you earn will reduce the amount of the social
security benefit that you are eligible to receive.
are everywhere if you know where to look. You may be able
to use an insurance policy that has a cash value or even sell
your current home and move into a smaller and more manageable
one in order to provide some additional funds for retirement.
list identifies some of these 'other' types of potential retirement
home, real property and business interests (partnerships
bonds, savings, checking accounts, CDs, cash and loans owed
property such as jewelry, antiques, paintings, rare books,
stamps, coins and collectibles
in a trust or an insurance policy with a cash value
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on Individual Retirement Accounts (IRAs)
retirement account (IRA) is a tax-favored retirement account
that you can establish for yourself or for a beneficiary.
Usually it is created as a trust or custodial account with
an organization acting as the trustee or custodian. Each year
you can make contributions that are held and invested for
use when you retire.
receive compensation (wages, salary, commissions, tips, fees,
bonuses, etc.) or are self-employed, you qualify.
traditional IRA, your annual contributions may be tax deductible
from your gross income, but the amount of the contribution
is limited to $3,000 per individual. For contributions to
be tax deductible:
cannot be participating in an employer-sponsored retirement
adjusted gross income must fall within IRS guidelines.
your contribution is not tax deductible, once contributed
your investments grow without tax liability until they are
withdrawn at retirement. If you withdraw funds from a traditional
IRA before age 59 and one-half, you are subject to a 10% penalty
tax in addition to ordinary income tax.
you must accept minimum distributions from a traditional IRA
by April 1 of the year following the year that you reach age
70 and one-half. If you fail to take these minimum distributions,
you face a 50% excise tax on the amount you should have withdrawn
but did not.
IRA allows only nondeductible contributions, but withdrawals
are tax free if you satisfy the requirement that there can
be no distributions within the five-year taxable period beginning
with the year of your contribution. High-income individuals
are not eligible for Roth IRAs. For those who qualify, funds
may be distributed tax free from your Roth IRA under the following
or after you attain the age 59 and one-half
your beneficiary (or your estate) after your death
you are disabled or for "qualified first-time home-buying
contributions are limited to $3,000 per individual. Taxpayers
may roll over amounts from existing IRAs into a Roth IRA with
certain restrictions. If you withdraw funds from a Roth IRA
before age 59 and one-half, you are subject to a 10% penalty
tax in addition to ordinary income tax.
IRA (Coverdell Education Savings Account)
education savings account is an investment vehicle targeted to
education expenses, not to retirement. It is intended to pay for
a child's qualified higher education as well as elementary and
secondary educations expenses (i.e., kindergarten through grade
12). For tax years beginning after December 31, 2001, the maximum
annual non-deductible contribution that can be made to an education
savings account is $2,000. The beneficiary of the account must be
under 18 at the time of the contribution. Distributions for
qualified education expenses of the beneficiary are tax-free.
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on Keogh Plans
(pronounced kee-oh) plan is a tax-advantaged retirement plan
for self-employed individuals (sole proprietors, partners,
or unincorporated professionals). Investors are not eligible
for these plans.
Advantages of a Keogh Plan
are deducted from your gross income for income-tax purposes.
These contributions and subsequent earnings (growth of funds
within the plan) are not taxed until withdrawn, usually at
and part-time employees need not be included. Similarly, employees
under the age of 21 or who have less than one year of service
need not be included. Contributions made for them are also
are two kinds of plans -- a defined contribution plan and
a defined-benefit plan.
contribution plan establishes an individual account for each participant
and pays benefits based solely on the amount in the account at the
time of distribution. For 2002, the annual contribution and other
additions to a participant's account may not exceed the lesser of
100% of the compensation actually paid to the participant or $40,000.
plan is designed to provide a specific benefit amount at retirement.
This amount is based on age, anticipated retirement date,
and other factors. Tax law restricts the payable benefit to
the average of your three highest consecutive years' earnings
(or a top figure that changes with each tax year).
contribute to either kind of plan until the due date of your
tax return (plus extensions), but the Keogh plan must be in
existence before the end of the taxable year in order for
a contribution to be deducted for that year.
work with an investment advisor to identify investments that
meet your needs. Plans vary, however, in how much discretion
you have and certain types of investments are not allowed.
of Funds at Retirement
can receive benefits as an annuity or in installments over
a period of years. These benefits will be taxed as ordinary
can receive a lump-sum distribution that is taxed in the year
received (unless nondeductible plan contributions were made).
You may qualify for "forward averaging," which allows your
lump sum to be taxed as if received over a period of years,
resulting in a lower tax bill in most cases.
may roll over (transfer) your distribution into an individual
retirement account (IRA). This allows your assets to continue
to grow on a tax-deferred basis although you must take minimum
distributions during the year after the year that you reach
age 70 and one-half or face a 50% tax on the amount you should
have withdrawn but did not.
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on Social Security
Much You Pay
are an employee (not self-employed), your employer withholds
a 7.65% Social Security tax from your earnings. You also pay
a matching amount for a total of 15.3% up to an annual earnings
limit. These taxes are used to finance Social Security and
Medicare benefits. If your earnings exceed a certain amount,
your tax on any income beyond that point is only 2.9%, which
includes both your portion and your employer's portion of
Medicare tax payments.
you become eligible to receive full Social Security benefits at
age 65 if you were born before 1938. Beginning in 2003, the age at
which full benefits are payable will increase in gradual increments
from 65 to 67 (for those born in 1960 or later). No matter what
your "full" retirement age is, you may start receiving benefits as
early as 62. However, if you start your benefits early, they
are reduced five-ninths of one percent for each month before your
full retirement age.
The amount of
your Social Security benefit is based on your date of birth, the type
of benefit you apply for, and most importantly, your lifetime
earnings. To find out how much you will receive, request a Social
Security Statement by visiting their website at
or call 1-800-772-1213. Once you have received your statement, be
sure to check your earnings record carefully. You share responsibility
with your employer for making sure all of your earnings have been
reported and that they are accurate.
are approaching retirement age, you must apply for Social
Security benefits. Contact your local Social Security office
before you retire for details.
Security benefits are taxable, based on a "provisional income"
Income During Retirement
are varying limits on how much you can earn, depending upon
your age, without reducing your Social Security benefit payments.
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leave your present employer before retirement age and if you
are vested in your employer's qualified retirement plan, you
may be entitled to a withdrawal of your funds, or a "distribution"'.
A distribution is typically classified as (1) an eligible
rollover distribution or (2) a lump-sum distribution -- or
sometimes both. You may want to seek the advice of a professional
retirement planner at Pacific American
when weighing these various options.
distribution is a type of payment that can either be transferred
to another account or cashed by you. Distributions cannot
qualify as eligible rollover distributions if they are:
payments made annually (or more frequently) and based on
a person's life expectancy, or
after age 70 and one-half as a minimum-required distribution.
distribution qualifies as an eligible rollover distribution,
you may do one of three things:
may roll over (transfer) your distribution directly into an
individual retirement account (IRA) or into your new employer's
retirement plan. This allows your assets to continue to grow
on a tax-deferred basis until retirement.
can receive a cash distribution that is fully taxed in the
year received, unless you made nondeductible plan contributions,
which are not taxable. If you are under the age 59 and one-half,
however, you may have to pay a 10% early withdrawal penalty.
can receive a cash distribution and roll it over into an IRA
or into a new employer's plan within 60 days of receiving
it. This option is complicated, however, by a 20% withholding
as a lump-sum distribution, the payment must represent the
entire amount and must be made in a single taxable year. A
lump-sum distribution is payable under the following circumstances:
you leave your employer
you attain the age 59 and one-half
a result of a disability if you are self-employed
a result of your death
distribution also qualifies as an eligible rollover distribution,
so you are entitled to choose between the same three options
offered for an eligible rollover distribution:
over your distribution directly into an IRA or into your new
employer's retirement plan.
a cash distribution that is fully taxed in the year received
- with no 10% penalty.
a cash distribution, and roll it over into an IRA or into
a new employer's plan within 60 days after receiving it (subject
to 20% withholding).
were born before 1936, and were a qualified plan participant
before 1974, you may pay a 20% tax on the portion of your
distribution attributable to your pre-1974 contributions.
This option is lost when you use an IRA roll over.
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Revocable Living Trust
find it is helpful to establish a revocable living trust to
manage their investment program and to simplify their estate
planning. Because this type of trust is revocable, you can
change the terms of the trust at any time. You can design
your trust to operate only if you become disabled or incapacitated,
or you can use it to administer your assets when you die so
that they are distributed according to your wishes and avoid
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Securities, LLC., All Rights Reserved