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Retirement Readiness: Financial Strategies For Your Retirement Years

provided by Paul Castillo, Northwestern Mutual Financial Network

Conventional wisdom tells us that once you start getting a paycheck, you should save a portion of it for retirement. Too bad life gets in the way: illness, children’s education, home renovations, job loss, divorce, and more can all dip into funds earmarked for retirement. It’s no wonder only 44 percent of Americans, aged 55 and older, have saved less than $100,000, according to a Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI). [1]

Still, it’s important for Americans – even those in their fifties and sixties – to know that it’s not too late to jumpstart their savings as they approach retirement. The following are some simple financial strategies to consider:

Know what you’ll need. Take the time to figure out – and revisit – how much money you’ll need in retirement. Experts estimate that retirees generally need at least 70 to 80 percent of their pre-retirement income. You can tap into Web sites that help calculate your life expectancy and how long your money will last in retirement. A few sites featuring financial calculators include www.longevitygame.com, www.aarp.org, www.ssa.gov, and www.smartmoney.com. If you haven’t already, it may be helpful to talk with a financial professional to develop a strategy to meet your individual needs.

Cut the debt. Eliminating consumer debt and curbing spending is a critical precursor to retirement. This may not be easy, however, seeing that the average American carries $2,328 in credit card debt, according to 2005 research by Myvesta, a non-profit consumer education organization. [2]

If credit cards are sabotaging your pocketbook, you can call your credit card company and renegotiate the interest rates being charged. You can also make a point to pay a set amount of extra money toward your debt. Look for this money by cutting out expenses you could do without – regular trips to coffee shops, pricey restaurants, and membership fees for services you don’t really use. It’s also wise to destroy your credit cards and keep just one card in hiding in case of emergencies.

Check how you’re saving. Many experts suggest that pre-retirees save at least 10 percent of their annual gross income but those with less resources may need to save more.[3] But how you save can be as important as how much you save.

First, always contribute as much as you can in savings plans. The government allows workers age 50 and over to save more than younger employees with “catch-up contributions,” allowing older workers to contribute thousands more to their 401(k) and IRA each year.[4] In 2006, the maximum contribution limit for an IRA (Roth or traditional) is $4,000 for the general population and $5,000 for those 50 and older by year-end. For 401(k)s, the maximum contribution limit in 2006 for pretax employee contributions is $15,000 for the general population; for those 50 and older by year-end, the limit is $20,000.[5]

Annuities are another savings vehicle worth considering. They offer a tax-advantaged way to guarantee an income for life, or alternatively, a set amount of income for a specific number of years.[6] In general, funds can be withdrawn from an account after age 59-1/2, at which time the earnings withdrawn are taxed.[7] Withdrawals prior to age 59-1/2 may be subject to ordinary income taxes and a 10% IRS early withdrawal penalty. It’s best to consult with a tax advisor for specific tax advice.

Be prepared for health’s ups and downs. While Americans are living longer, there are no guarantees for good health. Health-related expenses can impact the income you’ll need in retirement while medical conditions can jeopardize your retirement plans. It’s estimated that 60 percent of people over the age of 65 will need help with health and personal needs and activities of daily living as they grow older.[8] Having insurance for such needs may be a consideration.

Consider working at least part-time. If you receive a regular paycheck, you don’t have to draw as much from your investments to get by. This gives your savings a chance to grow and lowers the risk of your portfolio running dry. Employer-paid medical insurance for you and your spouse may also be a major benefit, especially if you’re waiting for Medicare to kick in.

Another way to look at working: those who retire at 65, work two days a week and earn 40 percent of their pre-retirement salary can increase their savings by 30 percent over five years.[9]

Even with retirement only a decade or less away, those in their fifties have the power to make the most of their prime earning years while refining their retirement strategies. By saving, investing and preparing wisely, pre-retirees can ensure a growing retirement nest egg for years to come.

{1} SmartMoney.com, “Last-Minute Retirement Planning,” 2004
{2} Myvesta.org, “Myvesta Survey Shows Americans Paring Down Credit Card Debt,” December 29, 2005
{3} SmartMoney.com, “Last-Minute Retirement Planning,” 2004
{4} SmartMoney.com, “Last-Minute Retirement Planning,” 2004
{5} SmartMoney.com, “Last-Minute Retirement Planning,” 2004
{6} Note: Payments under an income option are solely backed by the claims paying ability of the issuing insurance company
{7} www.aarp.org, “Managing Money in Retirement,” March 2004
{8} Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS), “Own Your Future,” December 2002.
{9} SmartMoney.com, “The New Retirement,” September 2005


Article prepared by Northwestern Mutual with the cooperation of Paul Castillo. Paul Castillo is a Financial Representative with Northwestern Mutual Financial Network the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, its affiliates and subsidiaries. Financial Representative is an insurance agent of NM based in Newport Beach, CA. Securities offered through Northwestern Mutual Investment Services, LLC, 1500 Quail Street Ste. 600, Newport Beach CA 92660, 949-863-5800, member FINRA and SIPC. NM is not a broker dealer. To contact Paul Castillo, please call 949-863-5800, email him at paul.castillo@nmfn.com or visit his website at www.waltosgroup.com/p_castillo. This article is for educational and informational purposes only. It is not intended to be used for tax or legal advice.