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Retirement planning: Part one

Who should plan for retirement? As far as we are concerned, everyone who has "earned income" needs to plan for retirement. In other words, if you are working, you need to plan for retirement. People retire because they are either forced to or because it's what they want to do. Whatever your reason, once you retire you need to have enough money to maintain your lifestyle. It doesn't matter how much or how little you earn, how old or young you are, you need to start and maintain a retirement plan. None of us know how long we are going to work, live, or be active. The assumption is that we are going to live active and healthy lives beyond our working years, and we will need funds to maintain the level of lifestyle to which we are accustomed. Mickey Mantle, whose family history is that of early death, once said, "Had I known I was going to live this long, I would have taken better care of myself." That shows the uncertainty of longevity.

Income tax projections

Do you know if you are going to owe money to the IRS on April 15, 2000? Do you know if you are going to get a refund? These are questions that, as a businessperson, you need to know the answers. You need to know the answers in November, not April, to enable you to plan your next six months to a year. You may be planning to purchase a new truck, take some time off, do a major truck overhaul, fix up your home, or add to your retirement savings. Though your records should be looked at by your tax preparer throughout the year so that he can spot potential problems or adjust your estimated taxes, a tax projection based on your operations through September will best indicate your tax position on April 15. That gives the tax preparer a full nine months of operations for the current year so that he can project and properly estimate how you will do for the full 12 months. The tax preparer can then prepare a tax projection and leave enough time until the end of the year to do proper tax planning.

It's never too early or too late to start planning and contributing to your retirement plan. Normally, we spend just about everything we earn, and the more we make the more we spend. We need to understand and discipline ourselves to swear that every year we are going to put a certain amount of money into our retirement savings. That money needs to be set aside just as we set aside money for food, housing, and clothing.

Once your money is in your retirement plan and invested, it then has the power of compounded earnings. This means that inside your plan, all your earnings are making tax-free money while it is in the plan. Over the years, that power of tax-free earnings will enable you to build quite a large retirement nest egg.

Please note – since it is now September, a type of retirement plan called the "simple" plan (which is one of several types of retirement plans) must be set up by Oct. 1 of this year in order to get contributions on your 1999 tax returns. If you are new in business after Oct. 1, you can still establish a simple plan and still get the 1999 deduction. We will talk about specific types of plans in later articles, but if you are interested in the simple plan, please call your tax advisor.

Once you retire and begin to make periodic withdrawals, the retirement plan is still earning money, which in good years can make even more money than your monthly withdrawals. Since we are living longer, healthier lives and remaining active, we are going to need a significant amount of money to provide for a relatively worry-free retirement.

What about social security benefits? Your monthly social security checks, combined with your monthly withdrawals from your retirement plan, should enable you to provide for your worry-free retirement. We are asked many times whether working longer increases our social security benefits. The answer is yes, but is it worth it? That depends on how long you live and how much you need the money. Generally, waiting to collect social security until you are age 70 is well worth it providing you live into your mid 80s. For example, if your earnings have been close to the social security wage limits, and you retire at age 62 your monthly benefit would be approximately $1,100. If, instead, you retire at age 65, that benefit would become $1,500. If you work to age 70, your monthly benefit then becomes $2,100, almost double for the extra eight years you worked from age 62 to 70. In addition, while you are working the extra years and increasing your monthly social security benefits, you can be adding to your own individual retirement account.

Also, keep in mind that if you are an employer and you cover your employees under a retirement plan, it becomes a key fringe benefit in keeping and/or hiring better people.