FAQs

Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. With thousands of investment possibilities, complex rules governing retirement plans, and so on, most people don't even know where to begin. Here are some suggestions to help you get started.

First, set lifestyle goals for your retirement. At what age do you see yourself retiring, and what would you like to do during retirement? If you hope to retire at age 50 and travel extensively, you'll require a lot more planning than other people. You'll also need to account for basic living expenses, from food to utilities to transportation. Most of these expenses don't disappear when you retire. And don't forget that you may still be paying off your mortgage or funding a child's education well into retirement. You will also need to figure out how you will pay for health insurance until at least age 65, when you will be eligible for Medicare. Finally, be realistic about how many years of retirement you'll have to fund. With people living longer, your retirement could span 30 years or more. The longer your retirement, the more money you'll need.

Next, project your annual retirement income and see if that income will be enough to meet your expenses. Identify the sources of income you'll have during retirement, and the yearly amount you can expect to receive from each source. Common sources of retirement income include Social Security benefits, pension payments, distributions from retirement plans [e.g., IRAs and 401(k)s], and dividends and interest from investments. If you find that your retirement income will probably meet or exceed your retirement expenses, you're in good shape. If not, you need to take steps to bridge the gap. Consider delaying retirement, saving more money, or taking more investment risk.

This is just a starting point. The further you are from retirement, the harder it is to project your future income and expenses. If you're ready for more detailed planning, consult a financial professional.

This question is difficult because the answer depends on your income and assets, your goals for retirement, and many other factors. Ideally, you should begin saving for retirement in your 20s. More time to save enhances your chances of having the kind of retirement lifestyle you want.

If you're in your 40s or older and haven't saved much (or anything) yet, you may face a challenge in building the retirement fund you need. The shorter your time frame, the less room you have for error. But don't panic — it's never too late to start saving. You may still be able to secure a comfortable retirement for yourself, but you may have to make some tough choices to do so. Here are a few tips if you're getting a late start:

• Save as much as possible: The more you save, the more you'll have when you retire. Try to maximize your contributions to IRAs, 401(k)s, and other tax-advantaged vehicles. Then supplement your retirement fund with mutual funds, savings accounts, and other investments.
• Cut current expenses: Chances are, not all of your expenses are absolutely essential. If you can wipe out or trim certain expenses, such as expensive coffees and daily lunches out, you'll free up more money to invest for retirement.
• Invest more aggressively, if you're comfortable doing so: This may help you build a retirement fund in a relatively shorter period time. Certain stocks and mutual funds may offer potential for your savings to grow more quickly. The tradeoff: These investments are subject to market risk that will expose you to greater volatility, including a possible loss of principal. Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review the prospectus carefully, including the discussion of fund classes and fees and how they apply to you.1
• Delay retirement: You may have no choice but to delay your retirement. This strategy will not only reduce the number of years without a paycheck, it will also buy you more time to potentially build a nest egg.
• Rethink your retirement goals: Set more realistic goals for your retirement (no beach house on the Riviera, for example). That way, you won't need as much money to fund your retirement.
If you fear you're getting too late a start, or you're not sure where to start, consult a financial professional. He or she can help you map out a plan to bridge the gap between where you are now and where you need to be when you retire.

It depends. The right answer in your case will depend on a number of key factors. These include, among others, your income and assets, your attitude toward risk, whether you have access to an employer-sponsored plan at work, the age at which you plan to retire, and your projected expenses during retirement. But it's possible to lay down some guidelines that may be of help to you.

The conventional wisdom has traditionally been that you should invest aggressively when you're young and then move gradually toward a more conservative approach. By the time you retired, you would probably end up with a portfolio made up mostly of high-grade bonds and other low-risk investments. However, the retirement landscape has changed dramatically in the past 20 years or so. As a result, many of our basic assumptions about retirement planning have been overturned.

The dwindling number of traditional pension plans and concerns about Social Security have led people to take greater responsibility for their own retirement. Investing more aggressively over the long term has become common as people realize that, without anyone else to take care of them, they need to build the largest retirement nest egg they possibly can. In fact, many people these days primarily use growth vehicles (e.g., certain stocks and mutual funds) for their investment portfolios and tax-deferred retirement plans (e.g., 401(k)s and IRAs), though the proportion of stocks may still be reduced as they near retirement.

Other factors have changed the way we think about and invest for retirement as well. People tend to retire younger, live longer, and do more during retirement than they used to. With the likelihood that you will have well over 20 years of activity to fund, it may be a good idea to invest more aggressively for retirement than previous generations did. And there's no reason to switch over to fixed-income securities completely upon reaching retirement, especially with interest rates at historic lows. Because bond prices typically fall when interest rates go up, a period of rising interest rates can affect the value of your bond holdings. Many financial planners suggest that you keep a suitably balanced portfolio, including some of your assets in growth-oriented investments, even after you retire.

Don't forget to carefully consider a mutual fund's investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

To answer this question, you must first answer several related questions. How big a financial burden would your death leave for others to deal with? How much of your salary is devoted to current expenses and future needs? How long would your dependents need support if you were to die tomorrow? How much would it cost to pay all of your final expenses?

When determining your life insurance need, you'll need to consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, career stage, and your intentions to pass on your property are all important factors you'll want to think about. Your need for life insurance changes as the circumstances of your life change. For example, you may be able to reduce the amount of life insurance coverage that you have once your children have grown and are on their own.

There are several methods you can use to calculate the appropriate level of insurance for you and your situation. Although they all share common features, some methods strive to be more simplistic, such as the income replacement method and rules of thumb. Others, such as the family needs approach and the capital needs method, involve more sophisticated calculations. You may want to investigate these methods and do some preliminary calculations to provide a basis for possible discussions with your financial planner.

Keep in mind that the worst mistake you can make concerning life insurance is to have a need and not have the insurance to cover that need. Having too little (or even too much) insurance can also be a problem. Proper insurance planning can provide peace of mind for you, as well as protection for those you care about.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. There are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely there may be surrender charges and income tax implications. Any guarantees are contingent on the claims-paying ability and financial strength of the issuing insurance company.

Single people with no children often don't need life insurance because no one is relying on their income. But there are some reasons why you might need life insurance if you're single.

If you died, who would pay for your funeral? Even a simple ceremony could be costly. If you don't have life insurance, someone else (e.g., your relatives) may have to foot these bills. Even if you have only a small policy, the death benefits could be used to cover these expenses.

Do you have debts in excess of your assets, or do you owe money together with someone else? Perhaps you're a joint debtor with your sister on her mortgage. If you died, she'd be responsible for the entire debt. Would she be able to make the monthly payments on her own? A life insurance policy naming her as your beneficiary could give her enough funds to cover your share of the mortgage, or perhaps to pay off the entire debt.

Finally, is it possible that your health will deteriorate? Maybe you have a family history of cancer or heart disease. If that's the case, you might have trouble buying life insurance later when you're older, especially if your health has begun to decline. Even if you're single now, you may be wise to buy life insurance now before it gets too expensive or you become uninsurable. After all, you may not stay single forever.

A living trust is a popular estate planning tool that lets you (1) retain control over the trust property while you are alive, (2) avoid guardianship in case you become incapacitated and can no longer handle your own financial affairs, and (3) pass trust property outside of probate when you die.

Legally, a living trust is a separate entity that you create while you are living to "own" property, such as a house, boat, jewelry, or mutual funds. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. A living trust gives you the flexibility to do any of these things.

However, you do pay a price for this flexibility. A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors.

A big advantage of the living trust is that it allows a successor trustee to automatically take your place and manage the trust assets if you become incapacitated. For example, you have an accident and are in a coma for six months. Your successor trustee can take your place and manage the trust while you are unable to do so. That way, your affairs continue as usual, and you should suffer no financial setback.

In addition, assets in the living trust do not pass through your will when you die. Instead, the assets in the trust are distributed by the trustee according to the terms you establish in the trust. Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Finally, since the trust is not subject to probate, the terms of the trust are private.

If you're receiving benefits based on your own work record, your benefits will continue. If you're receiving spousal benefits based on your former spouse's work record, those benefits will generally end upon your getting remarried, but you may be able to receive benefits based on your new spouse's work record, or on your own.

If you're a widow(er) under age 60, or you're disabled but under 50, remarriage ends any benefits based on the record of your deceased spouse. However, if you remarry after age 60 (or after 50 and are disabled), those benefits remain intact, unless you get spousal benefits through your new spouse (at age 62 or older) if those benefits are higher. If your second marriage ends as a result of death, divorce, or annulment in less than 10 years, you will again be eligible to collect benefits on your first spouse's record. Benefits paid to a disabled widow(er) are unaffected by remarriage.

Note, too, that if you were the working spouse during your first marriage, your remarriage does not change the Social Security benefits paid to either your new spouse or ex-spouse. Because the rules surrounding payment of benefits are complicated, and depend on your particular situation, contact the Social Security Administration at (800) 772-1213 for more information.