Do you know how much it will cost you to retire comfortably? You may be surprised.

Most people view retirement as a time to finally relax and enjoy the golden years. The ability to maintain your desired lifestyle during retirement is usually the result of wise retirement planning throughout your working life. We can help you start early.

The Qualified Advantage: Participating in a tax-qualified retirement plan allows you to contribute to your account on a pre-tax basis, thus potentially lowering your taxable income. In such accounts, assets grow tax-deferred until you're ready to withdraw the funds, typically at retirement. There is quite a significant difference in the potential growth between a tax-deferred investment and a taxable investment.

Types of Employer-Sponsored Retirement Plans

Retirement plans may be employer-funded, employee-funded, or both. The determining factor is the source of money that's being invested. Employer-sponsored retirement plans may be split into two general categories: Defined Benefit Plans and Defined Contribution Plans.

In Defined Benefit Plans, also known as traditional pension plans, employers establish a fund for workers that guarantee them a certain level of income for the rest of their lives upon retirement. The trade-off for this income stability is the lack of self-direction and knowledge of investment vehicles. That is, the employer invests the money in an account, while the employee has no control over where the assets are invested.

A Defined Contribution Plan permits an employer to contribute a predetermined maximum percentage on behalf of each participant. Employers can select eligibility requirements and establish vesting schedules to skew the plan to benefit more valuable employees. An important subset of this type of plan incorporates a salary deferral component through which an employee can elect to defer a certain portion of his or her salary to a tax-deferred, employer-sponsored retirement plan. If the plan is "self-directed" (and many of these plans are) the employee is responsible for selecting appropriate investment options from a fixed menu, and thus has more control over his or her future financial situation. Selecting a mix of appropriate investment vehicles is critical in determining the size of an employee's account at retirement. If the economy is healthy and account investments do well, a retirement account could grow significantly. Conversely, if the economy recesses and investments perform poorly, an account could decrease in value.

It's your choice - Participation in a Salary Deferral Plan is generally optional. If you choose to participate, you agree to contribute part of your current salary, pre-tax, to fund your retirement account. Your taxable income is reduced by the amount of your contribution, and the assets in your account have the opportunity to grow, tax-deferred, until they are withdrawn.

Features of Defined Contribution Plans

Defined Contribution Plans usually have many features that benefit participants, such as withdrawal options, a wide range of investment options, and in certain instances, an employer match or other contribution.

Vesting means ownership of contributions in a person's account. Any contributions made through salary deferral are always fully owned by the employee. However, a "vesting schedule" usually applies to any employer-made contributions. Basically, the employee is granted increasing ownership of employer contributions as that employee's tenure with the company increases.

Distribution Options
While employer-sponsored retirement plans may offer limited distribution options for individuals who are still employed and participating in the plan, distribution options must be considered by employees who are either retiring or leaving their employer. When an employee has retired or left a company for employment with another, one of the most important decisions involves the balance in that person's retirement plan. This decision should be based on several factors including: age (time to retirement), current financial situation, and whether the money is needed immediately or should be kept invested.

There are basically four ways to take a distribution upon retirement or termination:
Please note that ordinary income taxes are due on all pre-tax contributions to retirement plans when they are withdrawn, if not rolled over to another qualified retirement plan or IRA. In certain instances, a 10% early withdrawal penalty may also apply to amounts not rolled over.

Annuities offer a regular monthly payout, typically for life. This payout offers security, but may not offer other significant investment opportunities.

Periodic Payments are installment payments of nearly equal payments paid over a specified period of time, usually 5-15 years. This method again offers the stability of regular payments, however there is no guarantee of a lifetime income.

A Lump Sum is one cash payment of your entire account. Income taxes and any applicable penalties are due on amounts paid out, and the assets lose tax-qualified status. This means that an individual will pay a large amount of tax all at once, and will not be able to reinvest the assets while enjoying tax-deferred growth.

An IRA Rollover is the transfer of an individual's account to an Individual Retirement Account (IRA). This option allows assets to continue growing tax-deferred and offers the individual the chance to invest at his/her own discretion.

Individual Retirement Accounts

Today, people are living much longer lives. To supplement their employer-sponsored retirement plans, many people invest in separate personal retirement plans to secure a healthy income throughout their lifetime.

Perhaps the most popular among these plans are tax-deferred Individual Retirement Accounts (IRAs). IRAs allow for deductible contributions (depending on income limitations) and provide tax-deferred growth of assets.

There are three types of IRAs:

Traditional IRAs are available to any individual who has earned income and is under age 70 1/2. Contributions to Traditional IRAs may be tax-deductible, and allow for tax-deferred growth of assets. Withdrawals are subject to ordinary income taxes and may be subject to a 10% early withdrawal penalty if the IRA owner is under age 59 1/2.

Rollover IRAs are Traditional IRAs that only contain assets that have been rolled over from a qualified retirement plan. As long as an individual does not combine annual Traditional IRA contributions with qualified plan assets in this account, the assets may be rolled back into another qualified retirement plan at any time. Withdrawals are subject to ordinary income taxes and may be subject to a 10% early withdrawal penalty if the IRA owner is under age 59 1/2.

Roth IRA contributions are always non-deductible, but allow for tax-free withdrawals if certain criteria are met. Assets in a Roth IRA also grow tax-deferred.
IRAs were developed as long-term investment tools. To take full advantage of an IRA, or any other retirement plan, an individual must diversify assets among different types of investments. Many people choose investments that may produce the highest income returns - without paying attention to risk exposure. Others decide to purchase growth investments early on, and then shift to steady income-producing accounts in their later years. How your accounts will perform depends on the kind of investments you choose.

How to get started!

If you would like to get started on planning for your retirement, you will first need to calculate the annual income you will need in retirement in order to maintain the standard of living you desire. Financial experts estimate this figure to be between 70% and 80% of your pre-retirement income. Using this figure as a guide, you can then begin to invest or enhance your retirement savings, either through an employer qualified plan, an individual retirement plan, or both. Your Financial Advisor can help you determine the most effective, tax-advantaged investment vehicles to maintain your desired lifestyle throughout retirement.