Retirement Plan

For many people who are drawing on their savings to fund current retirement, the safest route often makes the most sense. This means being invested in T-bills and bonds which are certain not to lose value. However, like all issues in investing, there are some drawbacks to the safest approach.

Bond interest is taxed fully as income. For investments outside of tax-sheltered retirement plans, investors can often achieve greater after-tax income, with a minor amount of extra risk, by owning preferred shares of large established companies. The dividend interest is taxed at an approximate 35% rate for top income earners, compared to around 50% for interest income. This can mean a considerable tax saving at all income levels. People owning bonds are often at a disadvantage due to inflation. The amount of interest from bonds may be sufficient for current expenses, but will it be enough in 10 or 15 years when expenses are higher? A sound strategy, then, for people who are just retired and are facing another 20 or more years of life expectancy, would be to have at least some portion of their investments in assets that keep up to inflation. For some, the ownership of their home or other real estate may be enough. For others, it may be wise to have some ownership of stocks, in order to achieve the higher returns over time.

For retired people invested in stocks via mutual funds, a systematic withdrawal plan could work well as an alternative to owning bonds. Such a plan would allow the withdrawal of funds on a monthly or annual basis, much like receiving interest from a bond. However, there are two important benefits: (1) the amount withdrawn in the early years would be treated for the most part as return of capital, and therefore not taxed; and (2) if the rate of withdrawal is less than the rate of return achieved by the mutual fund, then the amount invested would continue to grow over time. Instead of, or in addition to, investing in bonds, using a systematic withdrawal plan connected to an equity mutual fund could well allow a retired person a higher after-tax income as well as inflation protection. (Direct ownership of a properly diversified stock portfolio could achieve the same advantages)

The next most important rule in achieving high retirement savings is to use a sound strategy. A sound strategy does not necessarily mean the safest strategy. Rather, a sound strategy is one which goes further, taking on a moderate amount of risk, in order to boost the average annual return over time. Consider someone starting with $100,000. After 30 years, the value of the portfolio, compounded at 5%, would be $444,671. If, instead, the portfolio compounded at 8%, the value would be $1,052,470. This is an enormous difference and would probably mean a lot to a retired person's comfort level and enjoyment of life. This illustrates why it is important to work hard to produce the extra 2 or 3 percentage points of average annual return.

The safest route in investing is to hold government treasury bills and short-term government bonds. Currently, this would give a return of no more than 5% per year. This provides for the almost certain return of money invested, plus interest. However, there is an important shortcoming to this approach for those seeking to maximize return over time. Historically, stock markets have produced a higher average rate of return than treasury bill or bond investments when measured over periods of several decades. For the period 1954 to 1995 in Canada (prior to the recent run-up in the stock market) average returns were as follows: T-bills 6.6%; Long bonds 6.6%; stocks 10.5%. (U.S. historical figures are similar).

Certainly, there is a higher risk associated with owning stocks, and the returns cited are for the broad stock market as a whole (not individual company stocks which may have done better or worse). In addition, there is greater volatility of returns year by year for stocks compared to the others, although over 10 year periods since the 1950s, stocks have shown positive returns. Will history repeat itself? That is, will a properly diversified stock portfolio continue to outperform T-bills and bonds? There are no guarantees. However, with history on their side, investors with at least 5 to 10 years until retirement, should consider some stock ownership in their portfolios. Perhaps, with a portfolio half in stocks and half in bonds, they would be able to achieve something closer to 8% on average than 5% over a period of a decade or more.

Various studies of historical data have concluded that portfolios that are diversified into different types of assets, such as bonds, T-bills, and domestic and foreign stocks, provide the best return and lowest risk over time. Indeed, in recent years, foreign stock markets have far outperformed the Canadian stock market (mainly due to the greater weighting of resource stocks in the Canadian market). Given that this may not change in the future, it makes sense for Canadian investors seeking highest returns and lowest risk to maximize the amount of foreign investments in their portfolio.

The investment choices available: Large corporations typically limit investment choices to Mutual funds bond securities share and . Smaller companies may do the same, but are more likely to allow self-direction of investments, allowing the participant to choose among stocks, bonds, mutual funds and other available investments, similar to the investment options available in a self-directed IRA. If investments in the 401(k) are limited, Casey will need to decide whether he prefers to contribute to an IRA, which would provide a broader range of investments from which to choose. ccessibility: While retirement savings are intended to accumulate until retirement, situations sometime arise that leave the participant no choice but to make withdrawals or loans from their retirement accounts. Generally, assets in a 401(k) plan cannot be withdrawn unless the participant experiences a . However, if the plan has a loan feature, Casey could take a loan from his account and repay it within five years (or longer if the loan is to be used for the purchase of a principal residence). IRA assets can be withdrawn at any time. However, except for approval contribution, the amount cannot be repaid to the IRA. (For information about taking loans from a qualified plan account,

t's not just investments that are the problem: Social Security needs financial resuscitation, and the bursting of the housing bubble that helped spark the financial crisis vaporized the home equity many people were counting on to fund their golden years. Corporations are curtailing traditional pensions and older Americans are being forced to work longer to make up the difference. Where does this leave our retirement plans? Ask a middle-class American when he plans to retire, and more often than not you'll get a wry chuckle and "I'll be working until I die." The attempt at humor masks what may be close to reality for some people.

The retirement-savings system in the U.S. is "a failed experiment," said Teresa Ghilarducci, the Bernard Schwartz professor of economics at The New School for Social Research in New York.

The U.S. system is "headed for a serious train wreck," said John Bogle, founder and former chief executive of the Vanguard Group, in testimony to a House committee hearing on retirement security in February.

Banking is just a part of life. Unless you keep all your cash locked up in a safe at home, you probably use a bank to hold on to most of your money. But not only do banks hold our money, but they provide a lot of useful services such as writing checks, offering ATM and debit cards, savings accounts, and even online bill payments. But these services aren't always free.

Even when a bank does offer free services, there are still many little events that can trigger small bank fees. Using an out of network ATM can cost you a few dollars. Having your balance in your account drop below a certain limit may trigger a monthly service fee. And obviously, overdrawing your account or writing a bad check can be costly.

While the fees may not always be large, if they happen frequently it can really start to add up. A few dollars here and there could end up costing you $20 each month or more.

The most important component of any New Years resolution is the part where you actually do it. Resolving to do something and then not carrying through only leads to frustration and failure. Why not increase your chances of achieving your long-term retirement planning goals by designing your resolutions better from the start?

Here are three achievable New Years resolutions that can help you meet your retirement planning goals. you’re saving less than $100 a month for retirement or not saving at all, it’s really hard to carry through on a resolution to save $500 a month for retirement this year. Your likely best case is to try it for a few weeks, realize your goal is not attainable, and – like nearly everyone else – give up on your one-month old resolution.

Instead, make your resolution realistic. Commit to raising your savings rate by a meaningful but reasonable level. If the goal is too easy, then it isn’t much of a resolution. But again, if your target is out of reach, you’re likely to throw the baby out with the bathwater, leaving you with less for your retirement.

NEW YORK - When it comes to retirement planning, one size does not fit all.

Consider the basics when drafting a retirement plan--housing, transportation, routine living expenses and health care--but there are so many variables that putting together a plan cookbook-style is almost certain to create future financial problems.

"Retirement planning is highly personal, an actuarial adviser for in Hartford, Conn. "There aren't many rules of thumb." That means reading widely and working closely with a financial adviser to develop a detailed plan that fits your needs.

It's also possible to make unplanned trade-offs during retirement to hold on to what's important. For example, if you planned to live on caviar and champagne in retirement, you can easily cut back to hamburgers and beer, if that means holding on to the vacation home.

Remember that you can't plan precisely for a potentially catastrophic medical problem, which may change everything. Health care is the wild card, and planning based on current expenses may not cover future costs.

"If you don't understand the risks, you can't mitigate them and that means you won't have a comprehensive retirement plan," Weiss says.

For many, failure to plan for retirement stems from inertia. If you've come down with a chronic case of the do-nothings, time will soon kick you in the butt. However, following the pack can be worse than doing nothing. Don't buy mutual funds, insurance or annuities simply because a friend or acquaintance bought the product or recommended it.