Four components of a secure retirement

Most people identify a financially secure retirement as one of their primary financial goals. Reaching that goal can be easier by examining the four sources of income you will have during retirement and identifying steps you can take now to increase each of those sources.

Social Security Retirement Benefits
The Social Security system has played a major part in Americans’ retirement planning for decades. The current examination and debate over the future of the system will probably produce some changes for future retirees.  Here are some basic facts you may want to remember:

  • Full Retirement Age – the age when you can start receiving “full” benefits is gradually moving from 65 to 67
  • Early Retirement Age – at age 62, you can start receiving a reduced retirement benefit
  • Average Retirement Benefits for retired couples for 2013 – about $2,048
  • Maximum Retirement Benefit for retired workers at full retirement age for 2013 – about $2,533. 

At this point, there is very little, if anything you can do to change the benefits you will receive from Social Security.

Employer Retirement Plans
Recent tax law changes have significantly increased the amounts that can be accumulated in corporate retirement plans, especially 401(k) plans.  401(k) plans offer a powerful way to accumulate funds – the amount you defer into the plan reduces your current taxable income, the plan probably has an employer matching provision, funds within the plan can grow on a tax deferred basis and the limits for contributions are large.

  • Employee deferral limit - $17,500 for 2013
  • Additional contribution limit for those ages 50 and over - $5,500 for 2013
  • Maximum total contribution limit (employee and employer) - For 2013, the limits are $51,000 and $56,500 respectively

Contribute as much as you can to your 401(k) plan and especially try to contribute enough to get the full employer match.  It is always nice to have your employer help you accumulate more funds.

Individual Retirement Accounts (IRAs)
Anyone with earned income can contribute to an IRA to supplement other retirement planning savings.  Both regular IRAs and Roth IRAs provide for the tax deferred accumulation of funds within the accounts.  Contributions to a regular IRA may be deductible if you do not participate in an employer sponsored retirement plan or if your income falls below certain levels.  Roth IRA contributions can be made by individuals with income below certain levels.

Contributions to Roth IRAs are not tax deductible, but Roth IRAs provide an additional benefit of their distributions not being subject to income tax and there is more distribution flexibility.  In addition, individuals ages 50 and over can make additional annual contributions. Learn more about contribution limits for regular and Roth IRAs. [PDF]

Your tax advisor may help you better understand how the tax laws would apply to your situation, but do not ignore this powerful retirement planning tool.

Other Savings
The final source of retirement income will be your other savings.  Accumulations in savings accounts and investment accounts, while not enjoying the tax preferences of 401(k) plans and IRAs, are still a major component of most individuals’ retirement income.  Saving more and earning more on these funds can add greatly to your retirement lifestyle. 

Consider taking advantage of automatic savings plans with monthly transfers to a savings account or investment account.  Also, be sure that your investment strategy is sound with consideration given to your goals, your time horizons and your risk tolerance.

As with any investment plan, please contact your tax advisor for questions on how the plan might affect your taxes.