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Are you on the right financial road to retirement? Americans are living longer, enjoying longer periods of retirement. However, this opportunity only raises the ante, requiring careful planning and investing for the financially comfortable future we all want.

A prosperous, comfortable retirement must be one of the most cherished chapters in the American dream. It means an opportunity to travel, to spend more time with family and friends, and to enjoy sports events and restaurants.

No matter what your particular vision of retirement might be, you need to know the right strategies to employ for a comfortable financial future.

This is important because Americans are living longer these days and therefore facing longer periods of retirement. In 2001, approximately 35 million Americans lived past the age of 65. By 2030, that number is expected to double to more than 70 million, and almost 9 million are expected to live past age 85.

Clearly, this generation will likely enjoy longer periods of retirement than our ancestors experienced, and you should be working to ensure a financially comfortable retirement as well.

Before going further, a reality check here. We need to acknowledge that inflation will take its toll, and Social Security may not be enough to provide the comfort you want for the future.

If inflation continues at a modest 3 percent per year on average, a dollar will buy one-third less 10 years from now than it does today.

What about Social Security? Elected leaders in Congress and the White House have promised not to tamper with Social Security, for the time being, referring to it as a "lockbox," though some seem to be searching for the key. Further, Social Security benefits will likely provide far less than the 75 percent of pre-retirement income that most experts say are necessary for a comfortable retirement.

The earlier you start saving for retirement, the better. That way the money you invest will earn interest and dividends and grow in value.

The goal is to close the gap between what you expect to receive from Social Security and 75 percent of your current income. This is relatively simple to determine. The Social Security Administration annually sends everyone an updated notice of anticipated retirement benefits, going forward from different retirement ages. Compare those figures with 75 percent of your current income and you'll know the size of that all-important gap. Then your financial advisor can help determine how much to invest by retirement age to close the gap. The younger you are, the lower the monthly amount you'll need to invest.

If you're a 55 year old with a monthly income gap of approximately $1,000, for example, you will need to set aside $653.49 per month to close the gap by age 65, based on the anticipated return on that monthly investment.

Many retirement planning opportunities are available, including some with significant tax advantages. When you invest in an individual retirement account (IRA) or employee-sponsored pension plan, you do not pay any taxes on dividends, interest and accumulated gains until you withdraw the money.

It's generally a good idea to maximize contributions to a company's retirement savings plans if they are available, before contributing to plans you can establish on your own, such as IRAs.

Corporations and some nonprofit organizations offer 401k plans, and recent changes in tax laws have opened opportunities for individual tax-deferred 401k plans for entrepreneurs. Then there are company-funded simplified employee pension plans (SEP IRAs) and simple IRAs, which are primarily employee-funded savings match plans. However, many investors are wisely monitoring their 401(k) plans more closely these days, in light of recent revelations of corporate accounting problems.

In addition, you can also establish your own tax-deferred retirement plans, including IRAs, Roth IRAs, rollover IRAs and annuities. Investment advisors can explain each option and help make wise choices.

Obviously, it's important to choose the right investments. Even with the stock market resembling a carnival ride in recent times, stocks have historically provided the best protection against inflation. In the 1950s, for example, Americans earned 19.35 percent on stocks. These investments earned 7.81 percent in the 1960s, 5.9 percent in the 1970s, 17.5 percent in the 1980s and 18.2 per cent in the 1990s. Mutual funds offer investors diversification, professional management and convenience.

As in any investment plan, it's important to decide how much risk feels comfortable. Your investment advisor can help you decide which type of investments best fit your risk concerns, and the time you plan to keep investments growing before retirement. Together, you can determine your goals and investment time frame, evaluate all available sources of retirement income and then set a course of action.

The best advice is always to make time work for you rather than against you. The earlier you can begin investing, the better.

Based on the assumptions of a fixed rate of 8 percent return and that earnings were reinvested, the examples of two very different investors underline the wisdom of starting investing for retirement sooner rather than later.

In the first example, an investor started, at the early age of 25, to save $100 per month. Just 10 years later, at age 35 and after investing just $12,000, his investment would have grown to $188,922.

On the other hand, an investor who didn't start saving until age 35, at that same $100 monthly figure, for a full 30 years would have to have invested $36,000. His nest egg would only be $146,185-a full $40,000 less than the investor above.

By saving at the regular $100 monthly rate, both these investors would be taking advantage of what's called "dollar cost averaging," essentially buying fewer shares when they're expensive and more when they're less so.

It makes good sense to save as much as possible as regularly as you can and to start as soon as you can manage.

You should participate in your company's tax deferred retirement accounts; invest in a diversified portfolio of stocks, bonds or mutual funds and use dollar-cost averaging (as noted above, the investment of a specific amount of money on a regular schedule regardless of whether the market is up or down).

You should also be ready to change your retirement savings plans as needs will inevitably change. For example, when your children are grown and have graduated from college, financial needs will be smaller.

Above all, you would be wise to work with financial advisors. Securing your financial future toward a fulfilling retirement may seem like an overwhelming task, but it can ensure a comfortable quality of life.

You need an experienced professional with you, helping you put the right strategies to work to pave the way for a comfortable retirement.

One way that financial professionals can help is by providing a financial assessment. This is a detailed blueprint of where you are now and roadmap to where you want to be financially at retirement. Generally provided with colorful graphs and charts, it's a confidential, practical, straightforward way to compare your current savings plan with your goals.

Through this useful process, with expert professional guidance, you'll find out how to achieve your retirement dreams and receive down-to-earth information about investing, insurance, saving for college and other important concerns--as well as retirement planning.

Individual Retirement Options:

Now More Important Than Ever

Individual retirement accounts offer tax advantages that make them ideal for families. Here are the main options.

A traditional Individual Retirement Account offers these features:

* You can contribute up to $3,000 (or 100 percent of earned income, whichever is less), some of which may be tax-deductible.

* Earnings on contributions are tax deferred. You don't pay taxes until funds are withdrawn from the account.

* You can withdraw funds without an IRS penalty before the payout age of 59-1/2 for certain qualifying expenses such as purchasing a home or paying for higher education; however, income taxes will apply on these withdrawals.

* If you were 50 or older on Dec. 31, 2002, you can make a $500 "catch-up" contribution.

A Roth IRA adds these important features:

* You have unlimited access to your contributions, without an IRS penalty.

* You can apply earnings up to $10,000 to the purchase of a first home, if you've had the account for five years or more; you can also transfer this benefit to your children.

* If you have held the account for at least five years and you are 59-1/2 or older, earnings are tax-free.

A Rollover IRA allows you to "roll over" funds from an employer-sponsored plan such as a 401(k) or pension plan upon leaving a job, or when you retire, for example. Depending on income level, you may/may not qualify to make a Roth contribution. Check with your advisor.

A Rollover IRA has these features.

* Your retirement savings will continue to grow, tax-deferred.

* You have greater flexibility in choosing investments and the ability to change IRA providers.

* You can withdraw money more easily than from an employer plan.

Travis Frisk is the Alaska district retail leader for KeyBank. He has more than 10 years of experience in the financial services industry. He can be reached at 564-0292.
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Author:Frisk, Travis
Publication:Alaska Business Monthly
Geographic Code:1U9AK
Date:Apr 1, 2004
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