Financial Futures

After Dennis has determined how much his retirement income needs are, he can compare them to the projected income stream that his retirement resources will generate. If his retirement resources exceed his needs, the excess can be used to fund other goals. If there is a shortfall or it appears that Dennis's money will not last during retirement, then he should now be able to quantify the amount needed to fill the gap.

Dennis has done a great job saving money over the years, including his 401(k) plan, into which he is contributing the maximum amount possible. This particular retirement plan offers many advantages, including contribution of pre-tax money, tax-deferred growth and possible employer contributions. What if additional savings are necessary? What options should be considered?

Tax-Deferred Investment Vehicles
There are numerous investment vehicles available through which one can invest, and I certainly cannot cover them all here, but tax-deferred investment vehicles should certainly be among the first considered. Tax deferred means that any earnings on the investment will not be taxed until they are withdrawn. The most common types of tax-deferred vehicles include company retirement plans, traditional IRAs, Roth IRAs and annuities. Retirement plans, including IRAs, have eligibility requirements, contribution limitations and premature penalties which should all be considered carefully before deciding which is appropriate for you.

A tax-deferred savings program can make a significant difference in the amount you can accumulate for retirement. If you invest $1,000 into a 401(k) plan, for instance, it would grow to approximately $10,000 in 30 years assuming an 8 percent return. If an investor paid income tax on the $1,000 at a rate of 28 percent and invested the remaining amount in a tax-deferred investment, he or she would accumulate a little more than $7,000. Compare that to an after-tax investment in a taxable account where the accumulation would be just slightly less than $4,000 at the end of the same 30-year period.

Mutual Funds
Perhaps one of the most common types of investments today is a mutual fund. Mutual funds are companies that pool investors' money to invest in a common fund. Most fund families have a vast array of funds, each with a specific objective to offer its investors, with investment choices ranging from stocks, bonds and real estate to specialty funds such as those that invest only in socially-conscious companies. Savings programs in mutual funds are easy to set up and to manage and are a great way to get started in investing. The large pool of assets in each fund allows it to properly diversify its portfolio, so the investor is exposed to less risk than with purchasing one or even a handful of securities.

Asset Allocation
The final point to be made for anyone in the accumulation phase of retirement planning is to consider investing based on an asset allocation strategy. Maintain some stocks in your portfolio. Keep your portfolio balanced with securities of small, large and international companies. Determine how much should be allocated to fixed income assets, and then stick with your plan. Review it periodically and re-balance when necessary. The sooner you begin, the more likely your retirement dreams will come true.

Expert Advice for Dennis
The Planning Process
Selling Your Home
Optimizing Savings
Preparing for the Home Stretch, from our sponsor, Merrill Lynch

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