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Retirement Planning EMPLOYER PLANS CALCULATING YOUR NEEDS INVESTMENTS DECISIONS

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Retirement Planning EMPLOYER PLANS CALCULATING YOUR NEEDS INVESTMENTS DECISIONS GOALS What You Should Know About... Retirement Planning EMPLOYER PLANS CALCULATING YOUR NEEDS INVESTMENTS DECISIONS Yo ur MoneyCounts™ No matter who you are or how much money you have, you’re probably hoping to enjoy a fi nancially secure retirement. Your retirement might be a distant, long-term goal—or it might feel as if it’s right around the corner. Either way, with a little planning, determination and some discipline, you can take the necessary steps to help you retire in comfort. You’ll fi nd there are plenty of tools you can use to make the most of your efforts. © 2005, HSBC North America Holdings Inc. All rights reserved. These are educational materials only, and are not to be used for solicitation purposes. These materials are not a recommendation by HSBC for any product, service, or fi nancial strategy. RETIREMENT PLANNING you a lot of anxiety later, when you Funding your fi nd yourself closer to retirement. retirement Compound earnings When you retire, you’ll still need to support yourself. How will you Time is a crucial element when manage when you’re not receiving it comes to building a retirement a paycheck? Social Security will account—and the more time you likely cover some of your costs. have, the better. That’s because of You may have a pension from your compounding, or the way earn- employer. But those benefi ts alone ings accumulate when you reinvest will probably not be enough to them. For example, if, one year, let you live the way you’d like to you earn an 8% return on $10,000, in your retirement years. To help your new total is $10,800. If you ensure a fi nancially secure retire- earn another 8% the following ment, you’ll need a plan for putting year, the new base amount of some of the money you’re earning $10,800 earns $864, and your bal- now into savings and investment ance grows to $11,664. Because accounts for the future. your earnings have the potential to Even if you’re a long way from generate more earnings, the longer reaching retirement, and your pri- the process continues, the bigger mary goals are buying a home or impact each dollar has. In fact, paying for your children’s educa- after 30 years earning 8% annu- tion, you’ll want to begin retire- ally, your $10,000 could be worth ment planning as soon as you can. $100,627 before taxes. Taking small steps now, while time can work on your behalf, will save 3 RETIREMENT PLANNING The power of Age Investor A Investor B compounding 25 $3,000 To take maximum advantage of 26 $6,300 the power of compounding, you’ll 27 $9,765 want to start saving for the future 28 $13,403 early. The chart shows the results 29 $17,223 of two investors, one who begins 30 $21,235 saving at 25 and another who waits 31 $25,446 until 35. 32 $29,869 Investor A sets aside $3,000 a year from the time he’s 25 to the 33 $34,512 time he’s 35. Over those ten years, 34 $39,388 he puts a total of $30,000 into that 35 $41,357 $3,000 account, earning 5% interest that’s 36 $43,425 $6,300 compounded annually. 37 $45,596 $9,765 Investor B also sets aside $3,000 38 $47,876 $13,403 a year from the time he’s 35 to the time he’s 50, and earns the same 39 $50,270 $17,223 5% annually compounded interest. 40 $52,783 $21,235 Over those 15 years he puts away 41 $55,423 $25,446 $45,000, or 50% more than 42 $58,194 $29,869 Investor A. 43 $61,103 $34,512 Compare what each has at the 44 $64,159 $39,388 age of 50. 45 $67,367 $44,507 46 $70,735 $49,882 A word to 47 $74,271 $55,527 the wise 48 $77,986 $61,453 Even the best plan 49 $81,885 $67,675 can’t guarantee you’ll 50 $85,979 $74,209 meet your goals. Things happen that you can’t predict. But making no plan at all leaves everything to chance. 4 RETIREMENT PLANNING If you’re close to retirement, that amount should be fairly easy to calculate. But if you’re many years from retiring, how can you tell what you’ll need? One way is to use a retirement planning calcula- tor that takes a number of factors, such as infl ation and projected wage increases, into account. Questions to ask You’ll need to identify the different sources of income you know Even though you’ll have: he saved more money, Investor B was • Will you be receiving a pension unable to catch up with from your employer? Do you Investor A’s early start. know how it will be calculated? • Do you save money in an em- ployer sponsored retirement savings plan? How much have Planning you accumulated? What will ahead this be worth when you’re ready to retire? Part of planning for retirement is • How much can you expect from calculating how much you’ll need Social Security? Check the to support yourself and the people annual statement that the SSA who depend on you. As a rule provides. It should arrive about of thumb, you can estimate that three months before your birth- you’ll need about day each year. 80% of your pre- • Do you contribute to a retirement income tax-deferred savings plan on to maintain your your own? What’s your standard of living. current balance? 80% of pre- And the amount • How much, if anything, do you retirement you need will already? have set aside specifi - increase over time cally for retirement in taxable income due to infl ation. accounts? 5 RETIREMENT PLANNING Then, you’ll want to add up Taking the next steps the amount you expect to receive Once you know how much prog- from each source. Sometimes—in ress you’ve already made, you’ll the case of a pension, for ex- be able to start fi lling in potential ample—you’ll have a fairly clear gaps in your retirement plan. That picture. But it can be more diffi - may mean setting aside more of cult to estimate income from your your income now, and making tax-deferred and taxable savings investment decisions that will help plans. Because their returns are not to increase the value of your sav- guaranteed, what you’ll have avail- ings. You can tackle this task in a able will depend on how much was number of different ways, includ- invested, where it was invested and ing participating in a 401(k) or how those investments performed. other employer sponsored retire- ment plans, opening an individual retirement account (IRA), buying annuities, and putting more savings into taxable investment accounts. 401(k)s advantage of saving money on taxes now and building your retire- Saving for retirement might seem ment account for the future. like an uphill battle, but there are Both the money you put into many things you can do that both the account and any earnings it make the process easier and allow produces are tax deferred until you your assets to build more quickly. For example, you may have the How a salary option of saving for retirement through an employer sponsored retirement plan, such as a 401(k). 4HEMOREMONEY These plans are also known as YOUPUTINA salary reduction plans, since you K PLAN can defer a certain amount of your pretax salary into your retirement account. You take home a little less, but you postpone income tax on the amount you put into your K account. So you have the double 6 RETIREMENT PLANNING withdraw, usually in retirement. • You may have more control Tax deferral means your account over how your savings are has the potential to compound invested faster, since you don’t have to take • You don’t risk losing track of out any of your earnings to pay your savings annual income taxes. • You have a bigger base of money to invest if you consoli- Portable plans date your accounts, which may entitle you to additional benefi ts Another big advantage of a 401(k) from the new trustee of your and other salary reduction plans is transferred accounts their portability. That means that when you leave your job for any You do have the right to with- reason, you have the right to move draw the money you’ve contrib- the contributions you’ve made to uted to a 401(k) when you leave your account plus any earnings to your job, but that’s usually not the a new employer’s plan—if the plan best choice. You’ll owe income tax accepts transfers—or to an IRA. on the total amount you withdraw, While you may have the option to plus a 10% federal tax penalty if leave your account with your for- you’re younger than 59½. And you mer employer, at least for a while, have to start all over again to ac- being able to transfer the money to cumulate retirement savings. The a new account has some potential better plan is to keep the money advantages: invested in a tax-deferred account to help achieve your original goal—funding your retirement. reduction plan works THELOWERYOUR THELESSTAX THEGREATER TAXABLESALARY YOUPAY YOUREARNINGS POTENTIAL 7 IRS 0!94/ Tax 7 RETIREMENT PLANNING Thrift savings plan A word to the wise • if you work for the The details of 401(k) plans federal government or vary from employer to em- one of the companies ployer, but participating in a that offer them plan if it’s offered is almost SIMPLE if you work always something you’ll • for a company with want to consider seriously.
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