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Retire With More Money than You Thought Possible

Do you know how to avoid costly retirement planning pitfalls – and what steps you can take today to ensure that you maintain your standard of living tomorrow? Are you worried about protecting your retirement assets in today's volatile market? PLJ Advisors can help you.

I Dream of Retirement…

The longer you work and faster you seem to age, the pot of gold at the end of the rainbow (retirement!) glistens all the brighter…until you start to think about the cost! Have you saved enough? Will you outlive your retirement? Will you have to work longer than you want to?

Retirement is not as simple as working and contributing to a 401(k) and depending on Social Security to fund the rest of your life. Retirement requires planning. Have you started yet?

PLJ Advisors specializes in helping hard working individuals and hard working business owners plan out their retirement “schedule”. In this section, we hope to educate you on many of your retirement options.

What Do I Need for My Retirement?

First and foremost, you need a retirement plan. It requires estimating your expenses, your income, how much you need to save and other factors.

Let’s look at the cost of retirement compared to several other life expenses:

If a comfortable retirement costs $1 million, how much of that is paid by your 401(k) and Social Security? Social Security will only cover about 40% of your retirement income.
With these figures in front of you, it is painfully obvious how much you need to save, no matter what age you are. However, most people don’t save for their retirement. Why?

Below are some of the reasons why people don’t save for their retirement:
• Operating on a tight budget

Those not in the habit of saving feel overwhelmed with their current expenses, such as children, mortgage, car payments, etc. Saving for retirement doesn’t seem possible yet.

The fact is, even saving just $500 every year will significantly increase the amount of money you will have for your retirement. See below regarding compound interest and triple compounding!
• Too young to care

Young people feel that retirement is too far off in the future to worry about.
In fact, the earlier you start saving for retirement, the less you have to put away every year to meet your retirement goal!
• Too much to think about

Everyone has had this feeling. However, the sooner you get started, the sooner it is done and your plan is in effect, working for itself.
• Impulse buys

Impulse shoppers have the most difficult time saving for anything, let alone something as big as retirement.

The fact is, even saving that $1.00 you spend on a soda pop every day will greatly increase your retirement income!

The importance of being proactive about your retirement is paramount! Hoping Social Security and/or your 401(k) will take care of it is not enough. Neither is waiting until “the last minute”.

The Importance of Starting Early

Those in their 20s see retirement as a long way off. However, think about how fast the last 20 something years flew by. We all know that time goes by faster as we get older. It is vitally important not to put off saving for retirement because it seems so far away.

As you get older, your responsibilities get heavier and more serious. Responsibilities like taking care of your children and paying your mortgage. Even with a lower income than someone settled into their career, now is the easiest time to start putting away money for your retirement.

Let’s look at an example at what saving only $2000 per year will do for your retirement, starting at age 25. We are assuming that this 25 year old does not increase his savings. He is taking advantage of compound interest (see below).

By age 30, our 25 year old already has $134,898 contributed to his retirement.
What about by age 65?

At this rate, our 25 year old will have enough money when he retires to take out interest only payments and receive $1202 per month! In addition, taking interest only payments means that he has no reduction of his principle!

According to current figures, you need about 80% of your income at retirement to live comfortably.

For example, if you make $60,000 per year you should have a retirement goal of $1,056,000 to continue living the life you do now.

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For a limited time only, and as our way of saying thank you, we are temporarily offering the following no strings attached bonus:

Bonus: Life time No Advisory Fee college 529 savings plan for 2 children in your immediate family (please, only two accounts per household ).

CLICK HERE to receive your bonus plus a free evaluation of your investment protection needs or call 1-888-755-2525.

I Want a Retirement Plan. How Do I Begin?

Start your retirement plan today by following the 5 steps outlined in this section:
The first step to organizing an effective retirement plan is gauging your retirement lifestyle. From there, you will have an easier time with the nitty gritty aspects of designing your plan. Be realistic. Gather accurate information in order to set realistic goals for your ideal retirement lifestyle.

Step 1: Know Your Net Worth
Your net worth equals your assets minus liabilities. Having an idea of what assets are available to you now makes it easier to develop a plan to produce more income in the future.

Step 2: Analyze Your Current Spending Habits
What are your expenses versus your total income? Where can you cut back today to maximize your retirement income?

Step 3: Asses Your Retirement Spending
Project what reasonable retirement expenses might be, and create a “retirement budget”. Be sure to take into account changes in your taxes and the inflation factor (see below).

Step 4: Define Your Retirement Lifestyle
After you have an idea of how you want to live during retirement, it is time to look at every angle and prepare your retirement plan around those angles. This is also useful to determine if your retirement goals are reasonable and attainable.

A few things to consider:
• Where do you want to live?

Are you planning to relocate, or stay where you are? What expenses or savings can you expect from your decision?
• How will you spend your time?

Are you planning to travel during retirement? Do you have hobbies or activities you wish to pursue that incur additional expenses?
• What income can you count on during your retirement?

PLJ Advisors always recommends playing it safe during retirement and budgeting with the money you are sure to receive, such as Social Security.

The above is by no means an exhaustive list. There may be other factors to consider, depending on your current lifestyle and net worth.

Step 5: Regularly Review Your Retirement Plan
Giving your retirement plan a once over is not enough to ensure retirement stability. Regularly conduct a financial review of your plan. Make sure you still have attainable goals. Always be willing to make sacrifices today if it means a more lucrative tomorrow.

A tip from PLJ Advisors: Keep a strict balance sheet of financial ups and downs during your retirement planning from beginning to end. This helps to ensure that your plan is working for you, and lets you know if you need to make adjustments.

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Estimating Your Retirement Expenses

Aside from just getting started on your retirement plan, estimating your retirement expenses is the most difficult part of the planning process. Much of your future expenses you can project fairly accurately, but there are some factors that you can only guess at.

Below is an outline for you to follow to help you determine what your retirement expenses may be. This is not exhaustive and of course is subject to change with every situation.

Expenses Likely to Change During Your Retirement
Again, not an exhaustive list, merely a guide to get you started.
• Housing

Many retirees have their mortgage paid off by retirement, so this ends up being a huge saving for most people. PLJ Advisors suggests making any major repairs to your home before you reach retirement.
• Insurance and Medical Bills

If you, like many retirees, choose to drop your life and disability insurance, this can be a big savings. However, take into account that your medical expenses will very likely go up as you get older.
• Taxes

If you do not work during retirement, you will not be paying any taxes into social security. Even if you do choose to work, or if it is necessary for you to work to fund your retirement, you will likely have a lower income and therefore be in a lower tax bracket.
• Entertainment

These are the expenses that usually increase in retirement, especially in the beginning. Many people want to travel or pursue an activity.
• Auto Expenses

Usually these costs go down. A married couple may choose to only have one vehicle versus two and maintenance will be lower because you will not be commuting to work every day.
• Annual Savings

Once you have reached retirement, you no longer need to save for it! Most big saving expenses are done with by then.
• Dependents

Most retirees don’t have dependents to take care of when they reach retirement.
Your Life Expectancy
The average man lives until about 74 years of age, a woman until about 84. Life expectancy is going up every year. According to the US Census Bureau, 100,000 Americans will live to be 100 years or older by the year 2010. That is 3 times that of 1990.

PLJ Advisors recommends you play it safe when projecting your life expectancy, and go beyond how long you expect to live. Be prepared to outlive your retirement.
Inflation Factor

The current rate is between 2.5% and 3%. However, these numbers are deceiving. Even these small percentages can have a huge impact on your savings in the future.

Let’s look at an example:

At age 35, Scott determined that in order to maintain his current lifestyle, he would need $40,000 a year during retirement (starting at age 65). However, Scott made a crucial mistake when constructing his retirement plan by not taking into consideration the impact of inflation on his savings. At inflation rate of only 3%, Scotts $40,000 at age 65 will dwindle to only $16,000 by today’s standards. That is only 40% of his goal. Assuming the inflation rate stays at 3% over the next 20 years, by the time Scott is 85 his money will only be worth about $8,700. His savings has dwindled to 22% of its original value!

PLJ Advisors recommends predicting an even higher inflation rate than this, although rates are not expected to go up.

Sources of Retirement Income

Here is a list of potential sources for your retirement income:

• Social Security Benefits
• Company Retirement Plans
• Company Sponsored Savings Plans (i.e. SEP, 401(k))
• Individual Retirement Accounts (IRAs)
• Personal Savings
• Annuities
• Investments
• Part Time Work During Retirement
• Proceeds From the Sale of Your Home
• Cash Value Life Insurance and
• Reverse Mortgages

For more details on many of these options, see below or contact PLJ Advisors.

Your Money Earns It’s Keep!

Fortunately for you, saving your money is not just saving your money. Compound interest and triple compounding using tax deferred investments can work in your favor as you put money away for retirement.

Compound Interest

Compound Interest differs from simple interest because it is calculated by the initial principle and the accumulated interest of prior periods. Simple interest is calculated only as a percentage of the principle sum.

In other words, compound interest is calculated on your principle and accrued interest.
Saving early and consistently is the key to making compound interest earn its keep! If you start saving early, no amount of money is too small to begin saving and earning.

Take a look at this chart:

As you can see, waiting only 5 years to utilize the power of compound interest cost this future retiree nearly $180,000!

Beginning your retirement savings early means that you don’t need a fortune to earn significant returns on your compound interest savings!

Let’s see what that $1 will do for you:

Invest $1 Per Day

Wow! At a 10% interest rate, your $1 will become $58,422 after 40 years!

The Rule of 72

Use the rule of 72 to figure the amount of time it will take for your money to double. Here is the formula:
72/Interest Rate = Time it takes your money to double!

Triple Compounding Using Tax Deferred Investment

Compound interest is only the beginning: an appendage to compound interest is the theory if triple compounding using tax deferred investments.

The beauty of triple compounding using tax deferred investment is that you earn money three times over:
• Interest on Principle
• Interest on Interest and
• Interest on the Money You Would Have Paid in Taxes

Your money remains tax free until you withdraw it.

Take a look at this table:

Power of Tax Deferral (Assumes $100,000 invested, 33% tax bracket)

The tax deferred investment outperforms the taxable investment (CD) by $108,799.

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Retirement Savings Vehicles

You have many options when it comes to saving for your retirement. PLJ Advisors has briefly outlined many of them here. We recommend you utilize as many of these options as possible to achieve the most fulfilling retirement.

For more information about your savings vehicle options, download PLJ Advisors free eBook on successful retirement.

Social Security

Social Security provides retirees with significant income, but by no means all of it. According to current figures, social security pays out less than 40% of what most people need to retire comfortably.

Social Security is getting less and less certain. Many baby boomers may not be able to take advantage of full Social Security benefits until age 68 or 69.

The fact is, unless enormous changes are made to our Social Security plan, there is no way the Social Security Administration can continue to pay benefits at their current schedule.

How Social Security Works

First, you must be insured under the Social Security program before benefits can be paid to you or your family. You become eligible for Social Security benefits when you have earned enough Social Security credits (previously called quarters) for the amount of time you worked.

You are eligible and entitled to Social Security Retirement Insurance if:
• You are at least 62 during your first year of entitlement and fully insured
• You have filed an application for retirement insurance benefits.

However, you do not need to file an application if:
• You are entitled to disability insurance benefits for the month before you turn 65
• Your disability insurance benefit has ended and your retirement benefit begins automatically

Employer 401(k) Plan

A 401(k) plan is usually offered by a corporation allowing its employees to contribute tax deferred income for their retirement. In some cases, employers will match those contributions dollar for dollar.

Using different types of investment vehicles, 401(k) plans give you the opportunity to save for your retirement by deducting a certain amount of money from each paycheck. An employer will usually match at least a portion of every dollar.

401(k) plans always require some kind of fee, and sometimes these fees are not apparent. It is very important to play an active role with your 401(k) by getting involved and being patient while your retirement money grows.

Basics of Your 401(k)

Participating in a 401(k) plan means that you assume responsibility for your retirement income by contributing part of your salary and often directing your investments. Consider your 401(k) plan carefully to make wise decisions.

The investment options offered by 401(k) plans have increased significantly, giving you more opportunity to grow your retirement. However, be aware of the cost. Small percentage fees can have an enormous impact on your retirement income.

Example:

You have 35 years until retirement, and a balance of $25,000 savings thanks to your 401(k) plan. If your returns average 7% over the next 35 years, and fees and expenses reduce your returns by an average of 0.5%, your balance will grow to $227,000 without any further contributions.

However,

If fees and expenses are increased to 1.5%, your balance will grow to only $163,000.
That is a reduction of 28% from only a 1% increase in fees and expenses.

However, your employer is responsible for finding you the best investment options, taking into consideration fees and expenses. ERISA requires employers to follow certain rules in managing your 401(k) plan.

For example, an employer must:
• Establish a process for selecting investment alternatives and service providers on your behalf
• Ensure that all fees are reasonable for the level and quality of service
• Select investment alternatives that are prudent and diversified
• Monitor selected investment alternative and service providers

Fees Associated With Your 401(k)

Fees and expenses generally fall into these categories:
• Plan Administration Fees

These fees are used for basic administrative services such as record keeping, accounting, legal advice, etc. These fees are deducted directly from your account, paid by the employer or charged against you assets. The more services provided, the higher the fees.
• Investment Fees

Investment fees may not be immediately apparent, and could come as a surprise later. These fees are associated with managing your plan investments and are charged as a percentage of your invested assets. This means that the net total of your return is the return after these fees have been deducted.
• Individual Service Fees

These fees have to do with additional plan options, such as the option to take a loan or direct your own investment. Those who participate in these additional options are charged from their account.

In addition, you may also see these fees, depending on your specific plan:
• Sales Charges

These are the transaction costs for buying and selling shares. They are different for different levels of investment.
• Management Fees

Taken as a percentage of your invested assets, these are ongoing charges for managing your investment fund.
• Other Fees

Fees used to cover services such as record keeping, toll free numbers, advice, etc. These are charged either as a flat fee or a percentage of your invested assets.
• Rule 12b-1 Fees

Associated with mutual funds, these are ongoing fees used to fund assets. They usually fall between 0.25% and 1% of your assets, paid annually.

How Your 401(k) Works

Most of the investments that your 401(k) plan utilizes pool money from many investors. This allows you individual participation and the opportunity to diversify your investment. You will benefit from the economies of scale and your transaction costs will be lowered.

Your money, along with others, may be invested in stocks, bonds, real estate and other investments.

Larger plans are more likely to pool your money this way. Smaller plans will probably use investment vehicles offered by financial institutions such as banks, insurance companies and mutual funds.
Fees are usually charged as a percentage of your invested assets.

Common 401(k) Investments

Usually your 401(k) plan will consist of investments in mutual finds, collective investment funds and variable annuities.
• Mutual Fund

If your money is invested in a mutual fund your money will be pooled together with many others.

You will own a share in the mutual fund. Some mutual funds levy front end load or back end load sales charges.

A front end load charge is taken when you invest a fund. A back end load charge is taken when you sell shares.
• Collective Investment Funds

These funds pool money together from other 401(k) plan holders and other similar investors. You have interest in this investment depending on the size of your investment.
Example:

The collective investment fund your 401(k) plan invested in totals $10 million. Your invested assets total $10,000. You have a 0.1% interest in the fund.

There are usually investment management and administrative fees associated with this kind of fund.
• Variable Annuities

Variable annuities are a contract between your employer and an insurance company. The insurance company will offer investment alternative for 401(k) plans through a group of variable annuities. You are able to select from these investment alternatives. The returns will vary depending on the option.

Variable annuities include insurance elements not available with other plans. These may include an annuity feature, interest and expense guarantees, and a death benefit. These are provided during the term of the contract.

Variable annuities charge management fees and administrative fees plus insurance related charges and surrender and transfer charges.

Important Documents

There are several documents you will and can receive regarding your 401(k) plan investment(s). These include:
• Account Statement

Your account statement will show the total assets in your account, how they are being invested and any increases or decreases of your investments during the statement period. You can also view your administrative expenses.

These forms are provided once a year upon request. You will not receive an account statement unless you ask for it.
• Summary Plan Description (SPD)

Your SPD shows you what your plan provides and how it operates. You will receive a copy of your SPD when your plan is put into action, then once every 5 years if you make modifications to your plan, and once every 10 years if you don’t make any modifications.
• Annual Report

Your plan’s annual report shows your assets, liabilities, income and expenses and fees you have paid (such as administrative fees). You can also view fees paid by your employer.
Your annual report is sent to you every year.

401(k) Loans and Their Consequences
Most 401(k) plans have an option for you to borrow against your 401(k) without incurring penalties. You can typically borrow up to half of your balance but not more than $50,000.

However, your loan must be repaid within 5 years (unless used as a down payment for a principle residence) with competitive interest rates.

Most financial advisors, including PLJ Advisors, do not recommend you borrow against your 401(k) unless absolutely necessary. It is easy to delay paying back the loan or not repay it. This defeats the purpose of your 401(k) plan.

Here is why PLJ Advisors highly recommends you do not borrow against your 401(k):
1. You give up tax free compounding of your money
2. When you do pay it back, you are replacing tax free money with after tax money. For example, if you fall into a 28% tax bracket, it will take $1.39 to replace every $1 you took out.
3. If you leave your current employer, you will need to pay the loan back immediately.

Pension Plans

There are two basic types of pension plans; defined-benefit and defined-contribution. The 401(k) plan is the most popular defined contribution plan.

A defined-benefit plan is what most people think about when they hear the term “pension plan”.
With a defined-benefit plan, the employer (or union) guarantees a certain amount of money to a retiree each year of retirement, whereas the defined-contribution plan leaves much more responsibility to the employee.

Defined-benefit pension plans are waning in popularity since the introduction of the 401(k) in the 1980s. Defined-contribution plans are cheaper for employers to offer than defined-benefit plans.
We’ll talk about defined-benefit plans first.

Advantages and Disadvantages of Your Defined-Benefit Plan

Big advantages of a defined-benefit plan are:
a) You are guaranteed retirement income, even if the company you work for goes out of business or runs out of assets, and
b) With a defined-benefit pension, the closer you are to retirement, the more the employer
contributions to your pension.

Some disadvantages are:
a) The defined-benefit plan is more expensive for an employer to operate.
b) Defined-benefit pension plans don’t really take into account Cost of Living Adjustments (COLAs), or in other words inflation.

Defined-benefit plans are expected to become less and less common because of the preceding factors.

How Your Defined-Benefit Pension Plan Works

Defined-benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC). This means that if you have participated in a defined-benefit plan and the company you worked for goes out of business or runs out of assets, you are still guaranteed at least a portion of your pension, and often 100%.

How much income you receive during your retirement depends on a number of variables, depending on how the company calculates it. Usually, however, the benefit is known in advance based on these factors:
• Age
• Earnings
• Years of Service

Your benefit may be calculated as a percentage of your salary and years of service. Here are some common ways of doing this:
• 1% of your final pay times your years of service
• A specific dollar amount for each year of service, i.e. $30 per month for each year of service for every person who worked at the company.
• An exact dollar amount, i.e. $1000 per month at retirement

The amount of your retirement income will vary depending on several factors:
• How many years you have worked at the company
• Either your average earnings over your tenure or your peak earnings or a combination of the two
• Your age when you start receiving pension benefits

Not all pension plans are calculated the same way. Different companies have different formulas, and all pension plans have additional rules and requirements that affect your benefit size.

When you are enrolled in a defined-benefit plan, you will receive a benefit statement and plan description each year describing your benefits.

Vesting

Vesting refers to the amount of time you spend at a company before you are eligible for all of your benefits.

There are two basic formulas for vesting:
• Cliff Vesting

On the cliff vesting schedule, you will become fully vested (eligible) after five complete years. This is also known as “all at once” vesting.
• Graded Vesting

Graded vesting works like this:
1. After 3 years, you become 20% vested
2. 40% vested after 4 years
3. And so on until you become fully vested at 7 years

How Your Defined-Contribution Plan Works

The biggest difference between a defined-benefit plan and a defined-contribution plan is that your retirement benefits are not guaranteed. Your retirement income from your defined-contribution plan is determined by how well your chosen investments do. Much more responsibility falls on your shoulders as the employee.

Usually your employer will offer a few investment choices in the plan. You are then required to become familiar with these options and choose the best on for you based on your retirement goals. If you are a control nut, this is perfect because defined-contribution plans allow you to control much of your retirement funding.

Depending on the specifics of the plan, your employer may or may not contribute to your retirement account.

Types of Defined-Contribution Plans

We have only listed the three most common types of defined-contribution plans.
• Profit Sharing Plans

This is the most popular type of defined-contribution plan, especially for small businesses. This plan affords employers with the greatest flexibility and is easy to administer. Essentially, the company puts aside money for your retirement when they show a profit. It is entirely at the employer’s discretion whether to contribute or not. They don’t have to.
• Money Purchase Plans

With a money purchase plan, the employer is obligated to contribute even if the company did not make a profit. Contribution is determined by a percentage of your compensation and is made annually.
• 401(k) Plans

The 401(k) plan is discussed in depth above. In summary, this plan allows you to make contributions to your plan on a “before-tax” basis by authorizing your employer to deduct from your salary for your retirement. 401(k) plans are often combined with other plans.
Contributions made by the employer are tax deductible.

Saving for Retirement: Small Business and Self Employed

According to a survey sponsored by the American Savings Educations Council, only 29% of small businesses with fewer than 100 employees offer any kind of retirement plan. This is due to the expenses involved in setting up the popular 401(k) or pensions plan.

There are, however, great alternative for small businesses and the self employed. Options include SIMPLE IRAs, SEP-IRAs and Keoghs.

Let’s look at these in more detail:
• SIMPLE IRA

The Savings Incentive Match Plan for Employees is specifically designed for small businesses with fewer than 100 employees (except employees earning less than $5,000 per year). This is an outstanding plan for small businesses and the self employed because it is “simple”. It is cheaper and easier to administer than a 401(k) or pension plan.

The Simple IRA is similar to a traditional 401(k). You can contribute to the plan on a pre tax basis like a 401(k). However, with a Simple IRA plan, the employer is required to match your contributions. They can do this one of two ways:
1. The employer matches your contributions at a maximum of 3% (or $7,000, whichever is lesser). 2 out of every 5 years your employer has the option to contribute less than 3%, sometimes as little as 1%.
2. The employer can contribute 2% of your compensation every year (maximum $4,000 per year), unless you earn $5,000 or less per year, in which case the employer does not have to contribute.

Simple IRA plans do have withdrawal restrictions similar to 401(k) restrictions. Usually, if you withdraw your money before age 59 1/2, you may incur a 10% withdrawal fee. Plus, the early withdrawal fee is 25% if withdrawn within 2 years of the date you first enrolled.

Simple IRAs are best for these groups:
a) Sole proprietorship with no employees (or a few participants)
b) Partnerships where only one partner participates
c) Small family businesses that hire spouse and children
d) Corporations with high turnover and low retirement plan participation rates
e) Small businesses with 100 or fewer employees

• SEP-IRA

Simplified Employee Pension (SEP) plans are similar to Simple IRAs because they are designed for small businesses and the self employed. To qualify for a SEP-IRA, the company must have fewer than 25 eligible employees.

SEP IRA plans do offer tax deferred investing and are appealing for employers because they are simple to set up and administer. However, rules for SEP-IRA plans are different than rules for SIMPLE IRA plans.

SEP-IRAs are considered the premium choice for a small business retirement plan for these reasons:
a) Simple and easy to establish
b) Offer employee eligibility after three years of service
c) They don’t require IRS filing or Form 5500 reporting
d) No administration costs
e) Employer contributions are tax deductible

SEP-IRAs are effective for a business with or without employees for these reasons:
a) As an employee, you can contribute up to $40,000 per year, which is a great deal more than a Simple or conventional IRA.
b) You as a business owner can make tax deferred contributions even if you are also employed and participate in a traditional 401(k)
c) Your contribution schedule is flexible

However, there are some disadvantages to a SEP-IRA plan when compared to other plans. These include:
a) Employer contributions are capped at 25% of the participant’s contribution.
b) If you are an employer, you must make contributions for your employees using the same percentage as contributions you make for yourself.

• Keoghs

There are two types of Keogh plans: Defined-benefit Keoghs and defined-contribution Keoghs. Keogh plans are also referred to as HR 10 plans.

Like the Simple and SEP-IRA plans discusses above, employers are generally responsible for all contributions made to the Keoghs. However, Keoghs do tend to be more expensive than a Simple or SEP-IRA plan and more complex to set up and administer. On the plus side, you can make contribution to your Keogh past age 70 ½, which is the cut off point for almost every other retirement plan option.

With a Keogh plan, you can invest up to 25% of your annual income, which also qualify as tax deductions. However, like an IRA, you will need to pay a penalty if you withdraw your money before age 59 ½.

If you start participating in a Keogh early and stay persistent with it, you can earn a substantial amount of money by retirement.

Here is an example:

Frank is a 30 year old business owner and earns $100,000 per year. He makes the maximum contribution for his income of $14,000 every year. By the time Frank reaches age 65, he will have $8 million for his retirement!

There are some issues that an employer should look at before investing in a Keogh. These include:
1) You as an employer will be required to include your employees in the Keogh. However, the contributions you make for your employees are tax deductible.
2) You as the employer must contribute to your employees Keogh regardless of profit or loss.
3) Like an IRA, money cannot be withdrawn before age 59 ½ without incurring a penalty (except in the case of disability).

Are You Eligible for Keogh Participation?

As a rule, if you have earned income from professional services you have rendered as self employed, you are eligible for a Keogh. The exception to the rule is when you have earned money from over seas. Money earned over seas does not qualify as self employment income. Also, if you are an inactive business owner you are not eligible for Keogh participation.

If you are enrolled in a Keogh retirement plan and you own multiple businesses, you must have a Keogh set up for each of those businesses. You have the option to roll them up into one or keep your accounts separate, but you must contribute for every business you own.

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Your Retirement Income: Saving vs. Investing

It is unlikely that savings alone will fund your retirement, especially if you are starting late in the game. Carefully investing your money can contribute significantly to your retirement income.

However, as an investor there are some steps you must follow to help reduce your investment risk(s) and obtain the best possible return on your money.

Always remember that there are never any guarantees when investing.

Deciding to Invest: Three Initial Steps

Before you jump into investing, consider these three rules carefully:

1) Set Goals: Saving or investing for your retirement requires very different investment strategies than those of purchasing a house, for example.

2) Determine Your Time Frame: The amount of time left until your retirement has a great impact on the types of investments you choose.

3) Determine How Much You Need to Retire: This requires developing a solid retirement plan. Underestimating how much income you need to comfortably retire is a devastating and common mistake.

Not only do you need to consider these rules before you begin investing, but you should assess your risk tolerance. Investigate the types of risks you will encounter and how well you will or will not be able to handle the inevitable ups and downs of your investment choices.

Investment Risks

There are four types of risk you should consider before creating your investment portfolio. These include:
• Business Risk vs. Market Risk

Business risk is the risk that the stocks you invest in will decline, eroding your principle.
Market risk is the danger that the entire stock market will decline, eroding your principle.

To lower business risk it is important to diversify your portfolio between stocks and bonds and mutual funds. To lower market risk, invest for long periods of time and resist the urge to impulsively buy and sell.
• Interest Rate Risk

When you buy bonds, you risk changes in interest rates. The danger is that the interest rate on your bond will end up at less than market value.
• Credit Risk

There is always a chance that the creditor will not be able to pay its debts. Considering this type of risk is especially important when you consider corporate bonds. However, you can alleviate this risk by steering clear of “junk bonds”, or those not rated. Bonds with less than an AA rating should be avoided.
• Outliving Your Money

If there is a good chance you will outlive your money, it may be necessary for you to accept more investment risks to achieve a potentially higher return.

You Have Decided to Invest…Now What?

Before you begin your investment process, you must prepare a financial summary. Your summary should have two parts:

1) Summary of expenses
2) Complete listing of income

Then you should make allowances for the future, such as increase in income, inflation, baby expenses, purchasing a home, etc.

Next, you need to identify your assets and liabilities. Use structured fact finders to be sure to cover all of your assets and liabilities, such as:

a) Property Assets
b) Cash Reserve Assets
c) Equity Assets
d) Fixed Assets
e) All of Your Liabilities

Next you need to determine how you will allocate your assets. How you allocate your assets among stocks, bonds, cash, etc. will determine your investment return.

If you have a relatively short time until retirement, focusing on your asset allocations can help you achieve your retirement goals.

Types of Retirement Investments

Once you have reviewed all of the factors explained above, you can start to investigate your different retirement investment options.

Let’s talk about two of these options:

• Stocks
• Mutual Funds

Stocks
Usually when you purchase stock you are purchasing common stock. Depending on the common stock you invest in, the dividend and yield will be different. If you have a choice of investing stock in two companies within the same industry, the amount of dividend paid will play a big role.
Broken down:

a) Common stock represents an ownership share in the company that issued the stock
b) Dividends are the profits that the company distributes to its shareholders
c) Yield is the current dividend divided by the share price

Many companies issue a special class of stock called preferred stock. Usually these stocks pay higher dividends than common stock, but don’t have the same price appreciation as common stock.

Stocks fall into five basic categories. They are as follows:

1) Growth Stocks
These stocks show consistent earning growth but usually pay less in dividends.
2) Blue Chip Stocks
These stocks offer safety and reliability and normally pay good and steadily rising dividends which are usually reinvested in the company.
3) Income Stocks

These shares are usually less risky and pay much larger portions of profit in the form of quarterly dividends.
4) Small Cap Stocks

These are typically made up of new and fast growing companies and the long term average returns are higher. However, they are riskier than blue chip and income stocks. Remember, the higher the risk, the greater the return.
5) Foreign Stocks

The American market represents less than half of all your stock opportunities worldwide. Two benefits of adding foreign stocks to your portfolio are diversification and performance.

Mutual Funds

Mutual Funds are professionally managed by an investment company. They utilize the money of many investors to pool the resources and diversify the portfolio. Each share of the mutual fund represents a part of the mutual fund’s portfolio.

There are two types of mutual funds:

1) Open End Mutual Funds

These types of funds buy and sell an unlimited number of new shares, and therefore the amount of money in the fund is always changing.

2) Closed End Mutual Funds

These types of funds have a relatively fixed amount of assets under their management.

Mutual funds fall into four categories:

1) Stock or Equity Mutual Funds
These funds invest in all types of stocks.

2) Bond Mutual Funds
These funds invest in all types of bonds.

3) Money Market Fund
These funds invest in short term financial instruments such as Treasury bills and CDs.

4) Diversified Mutual Funds
These funds diversify their portfolio in stocks, bonds and some growth and income companies.

The type and category of mutual fund you invest in will depend on your situation.

Mutual funds are popular because they are easy to obtain, they usually have good performance, they are an easy and low cost way to diversify your portfolio, it is easy for you to add money to your fund, and your money is managed by experienced professionals.
Some downsides to mutual funds, however, are that their asset value fluctuates with the changing market and the commission and fee structures associated with mutual funds can be confusing and lower your yield.

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I Dream of Retirement…Early!

Early retirement is quite an endeavor to take on, and pretty much impossible if you are not fully prepared.

To help determine if you are truly ready to retire early, consider these questions:
• Do you have enough money to retire comfortably?

According to the experts, by 2011 when the baby boomers start to retire it will take $1 million dollars to replace a $50,000 salary.
• Does your retirement plan cover every angle?

Have you identified the lifestyle you expect during retirement? Have worked out all of your potential expenses during retirement? Have you taken into consideration the inflation rate and result of taxes on your savings and investments?
• Have you anticipated the possibility of outliving your retirement income?

The lifespan of the average American is increasing every year. Today, a 65 year old man can expect to live nearly 15 more years. There is a 50% chance that a 65 year old woman will live until age 90.

These are important questions to consider before you take the leap into early retirement.
Also consider these fundamental factors:

Dealing With Early Retirement Penalties

If you retire early, you will face Social Security penalties such as:

• Early retirement penalty
• Fewer high earning years will result in lower Social Security benefits

If you are involved in a defined-benefit pension plan, you can anticipate receiving less income the less you work. Every defined-benefit pension plan is structured differently, but almost all of these plans have a negative impact on your early retirement.

If you are enrolled in a defined-contribution pension plan or a 401(k), the effects on early retirement will be less dramatic.

Dealing With Medical Expenses in Early Retirement

As you grow older, your medical expenses will likely increase. Retiring early can have an impact on you medical expenses. For example, if you retire before age 65, Medicare may not be available to you.

If you decide to retire early, there are some options to help you deal with increasing medical expenses:

• Stay on your employer’s insurance if possible
• Take advantage of the extension allowed under COBRA
• Convert to an individual policy after COBRA
• Find an individual policy

Tips to Handle Your Early Retirement

If you must, for whatever reason, retire early and your Social Security benefits haven’t kicked in, here are some tips to help your money go further:

• Cut down on pre retirement expenses
• Invest your retirement money for additional growth
• Work part time during retirement
• Modify your retirement standard of living
• Take out a reverse mortgage on your home

Potential Threats to Your Retirement Income

There are several major factors that could have a significant impact on your retirement. It is important to take these into consideration when preparing your retirement plan.

Major threats to your plan include:
• Major Health Problems

Keep in mind that Medicare does not cover all of your medical costs. If you need an extended stay in a hospital or nursing home, your savings could be wiped out. Medicare will pay for some of these expenses, but not until your savings is completely diminished.
• Long Term Care (LTC)

Fortunately, Medicaid pays for over 70% of nursing home costs, but at a rate of $40,000 to $85,000 per year in LTC costs, your savings could still suffer tremendously.
• Conflicting Financial Needs

If your parents will need financial assistance as they get older, it is important to factor this into your savings before retirement. Don’t sacrifice your own retirement savings and investments because you didn’t consider conflicting financial needs.
• Loss of Your Job

If you suffer a long bout of unemployment, not only will you be forced to stop saving, but you may feel compelled to dig into your retirement savings. To help avoid this kind of scenario, plan ahead in case you are laid off. Here are some ideas for you:

a) Set aside an emergency fund to cover at least 3-6 months of expenses
b) Start saving for retirement early
c) Keep your resume updated and job connections current

If your career collapses and you find yourself out of a job or settling for a lower paying job, there are some options available:

a) If your company offers an attractive severance package, consider retiring early
b) Consider retiring later
c) Reevaluate your current budget and your retirement budget
d) Find out about unemployment insurance options from your state’s unemployment office

• Divorce

Several factors due to divorce can impact your retirement income. These include:

a) Losing assets in a divorce settlement
b) Legal fees deplete savings
c) Increased cost of living separately
d) Alimony and/or child support payments
e) Saving without the help of a spouse

However, there are sources of retirement income for divorcees depending on your circumstances. These include:

a) Eligibility for Social Security benefits based on your former spouse’s earnings (if the marriage lasted 10 year or longer)

b) Entitlement to a portion of your spouse’s pension or IRA (depending on the settlement)
The death of a spouse incurs many of the same problems as a divorce with the exception of one crucial financial advantage: All the retirement savings accumulated by your spouse and you belongs to the surviving spouse.

Making Your Retirement Income Last

In addition to careful planning, consistent savings and wise investments, there are key elements to making your retirement income last once you get there.

Cut Your Taxes

Take advantage of all the tax breaks available to you!
• Have the correct taxable, tax deferred and tax exempt investments.
• Take advantage of a Roth IRA. The money is tax free when taken out.
• Reduce capital gain taxes.

Reduce Your Expenses

Reduce your unnecessary expenses and increase your retirement cash flow. Here are ways to increase your cash flow:
• Get rid of your high interest rate loans, such as credit cards.
• Refinance your home.
• Downsize your home.
• Make sure you are getting the most out of your investments.
• Protect yourself from inflation.

Protecting yourself from inflation is probably the most critical aspect of saving for a comfortable retirement.

Take a look at the effect of inflation on these necessary goods from 1970 to 1990:

Considering inflation is a major factor in an effective retirement plan.

In Conclusion

Plan carefully for your retirement. Create an exhaustive financial summary for both current and retirement conditions. Regularly update your plan to ensure that it is still working for you.

Begin saving and investing as early as possible. The earlier you start, the less you have to save annually. Take advantage of compound interest.

Take full advantage of benefits like a company 401(k), an IRA or pension plan, but don’t leave your retirement income entirely up to these important options. Social Security accounts for only about 40% of your retirement income. It requires at least 80% of your pre retirement income to maintain your current lifestyle during retirement.

Take steps today to ensure more for tomorrow. Always be willing to make sacrifices if it means more for the future. If anything, over project your expenses and future inflation rates.

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