MAKING SENSE OF TAXES IN RETIREMENT

Making Sense of Taxes in RetiremeNT

During your working years, everyone told you retirement was the easy life. As you near retirement, however, perhaps it’s seeming like a bit more work than you had imagined. After all, correctly positioning your various retirement accounts, honing in on your risk tolerance, determining your income sources, creating a budget, and deciding the age to start accepting your Social Security benefit are all important issues that should be at the forefront of your retirement planning checklist.

But have you given much thought to the role taxes will play in your retirement lifestyle?

Sadly, most retirees have not, and risk detonating the potential ticking tax time bomb in their portfolio that could have been avoided with a little bit of education and a touch of guidance.

Although taxes are imminent to some extent, once you retire you have the distinct advantage of being able to choose what to pay yourself for income each year by withdrawing from your various accounts or accepting a Social Security benefit. Estimate your taxes for the year and see how much additional room you have in your current tax bracket before you reach the upper threshold. “Maximizing your tax bracket” refers to taking additional withdrawals to “fill up” the entire bracket without going into the next one.

Tax planning for retirement seems simple at first glance, however, retirees face a completely different set of challenges than do younger taxpayers. Oftentimes, clients come to a financial services professional (FSP) with a tax situation they weren’t ever expecting to face, and many of them have forgotten to account for taxes altogether when making important calculations. Each year you should carefully plan out you and your spouse’s income to ensure you know which tax bracket you’re going to land in. By developing and utilizing tax-efficient withdrawal sequences for your income, you can delay having to tap into your tax-deferred accounts until later in life. Many people seem to think that taxable income decreases or goes away in retirement, but that is not the case.

In order to pay Uncle Sam as little as possible over the course of your retirement, you must understand how your different modes of income will be taxed. Planning carefully – on both a long-range and an annual basis – in regards to your tax brackets, will help you increase your post-tax income for retirement. Remember that in retirement, you control (to some degree) how much you pay yourself in income each tax year from actualizing the funds from your retirement accounts.

Long-range tax bracket planning entails putting together a snapshot of the amounts you’ll withdraw from your retirement accounts and other financial vehicles through the years, and carefully coordinating it with when you start accepting your Social Security benefit. In doing so, many retirees are able to rearrange their income sources in such a way that delivers them more after-tax income. While long-range planning assists in designing an overall tax and income strategy over the course of retirement, annual planning, or being able to “control your tax bracket” each year provides an opportunity to revisit ways to reduce tax burden by taking full advantage of standard or itemized deductions and personal exemptions.

As our lives evolve and change, so does our tax situation. Just as it is important to revisit your risk tolerance as your financial landscape continues to undergo major life events and changes, it’s also necessary to do so from a tax perspective. As many retirees leave the working world, they drop into a lower tax bracket initially from the time they retire and stop receiving normal paychecks on through their 60s. At age 70½, however, you’ll be required to take required minimum distributions (RMDs) from your 401(k) or your traditional IRA.

These distributions, along with any other income you’ve still got coming in, has the potential to push you into a higher tax bracket. Some retirees have found success in taking distributions to steadily and carefully draw from their IRA while still in their 60s, and remain in the same tax bracket – many times this helps them avoid getting bumped into a higher bracket.

As most of us know, you’re not able to dismiss taxes altogether. If you are proactively taking measures to be as tax-efficient as possible, however, you will have a leg up on many retirees. It’s always recommended that you work with a tax or financial services professional to help you prepare. With proper tax bracket management, allocation and diversification of your assets, you can be better prepared and help keep as much of your retirement funds as possible.

If you have any questions, please contact us at 484-206-4200.

Thinking About Your Lifestyle In Retirement

Thinking About Your Lifestyle In Retirement

If you are nearing retirement age, you may be exploring ways to put your retirement savings to work in creating a reliable income for yourself well beyond your working years. You may have already devoted some time to speaking with someone to help you accomplish this, because let’s face it, retirement is complicated. Most of the topics surrounding retirement involve money, and rightfully so – it’s the main thing on most American retiree’s minds. Aside from money, however, there are other lifestyle factors that will be key drivers of your retirement success.

Balancing both the management of your finances and your lifestyle in retirement will play large roles in how you’re able to enjoy your new chapter of life.

By exploring the topics listed below, you may gain some insight on ways to make your retirement more comfortable and enjoyable.

1. Downsizing may make a lot of sense

The choice to downsize your home once you enter retirement is a big decision, but, depending on your home ownership costs, it may potentially be one of the best ways to create retirement income by extracting equity from your home to serve you elsewhere in your retirement budget. Many retirees require a larger house and more property to raise their family – commonly in houses with multiple floors and two or more bedrooms and bathrooms. Once the children become adults and move out, retirees often find themselves with too much space.

In addition, many retirees, as they prepare to grow older, may have a desire to have all their rooms and utilities located on one floor, eliminating the need to travel up and down stairs to complete daily tasks like laundry, cleaning or cooking. A smaller yard may also mean less upkeep and maintenance. As mentioned, downsizing to something more modest may create immediate equity to help accomplish other retirement goals, and likely will also cost you less in taxes, insurance and utilities. Beware, however, the costs associated with downsizing. Do your homework to ensure real estate and moving costs don’t eat away your newly-recognized equity.

2. Make your physical health a priority and a hobby

The cost of assisted living facilities jumped 14 percent in 2017, to more than $54,0001 per year, so it’s easy to understand why so many Americans have large amounts of their retirement savings wiped away due to the need for some sort of long-term care. A multitude of factors play into your health in retirement but staying active and working on building and maintain strength can make a world of difference in preserving your mobility, balance, posture and overall well-being. While we as humans will undoubtedly age, and if we live long enough, may eventually require some form of living assistance, you can help stave off the aches and pains of old age with a healthy diet and regular workout routine. In addition, many retirees are making a hobby out of their fitness activities, and it’s easy to see why – yoga, cycling, water aerobics, dance classes and golf are all great ways to stay fit and meet new friends. In addition, studies show exercise can reduce your chances of a fall and can boost memory and prevent dementia.2

3. Consider a part-time job to stay active

Many retirees find it difficult going from forty or more hours of work per week down to zero when they retire. With so much more free time, it’s easy to see why. In addition to extra time, many retirees underestimate the socialization aspect of working life. Many Americans are finding that going from full-time employment to an enjoyable part-time job strikes the perfect balance – it allows them to retain some semblance of work-related accomplishment, along with the socialization factor mentioned previously. In addition, the added income from working part time allows you to stretch your retirement budget further or leverage the extra cash for investments. Working part time may also allow you to delay touching your tax-deferred dollars, saving them until you absolutely need to withdraw them, and they become subject to taxes.

If you have questions about preparing for retirement, call me at (484) 206-4200.

Sources:
1 http://www.richmond.com/business/local/study-shows-cost-of-long-term-care-continues-to-rise/article_1fb90ff2-9a6a-5914-8574-5ba90be7e4ba.html
2 https://www.webmd.com/healthy-aging/features/exercise-older-adults#1

Four Common Questions About Social Security

As you near retirement, it's likely you'll have many questions about Social Security. Here are a few of the most common questions and answers about Social Security benefits.

Will Social Security be around when you need it?

You've probably heard media reports about the worrisome financial condition of Social Security, but how heavily

should you weigh this information when deciding when to begin receiving benefits? While it's very likely that some changes will be made to Social Security (e.g., payroll taxes may increase or benefits may be reduced by a certain percentage), there's no need to base your decision about when to apply for benefits on this information alone. Although no one knows for certain what will happen, if you're within a few years of retirement, it's probable that you'll receive the benefits you've been expecting all along. If you're still a long way from retirement, it may be wise to consider various scenarios when planning for Social Security income, but keep in mind that there's been no proposal to eliminate Social Security.

If you're divorced, can you receive Social Security retirement benefits based on your former spouse's earnings record?

You may be able to receive benefits based on an ex-spouse's earnings record if you were married at least 10 years, you're currently unmarried, and you're not entitled to a higher benefit based on your own earnings record. You can apply for a reduced spousal benefit as early as age 62 or wait until your full retirement age to receive an non-reduced spousal benefit. If you've been divorced for more than two years, you can apply as soon as your ex-spouse becomes eligible for benefits, even if he or she hasn't started receiving them (assuming you're at least 62). However, if you've been divorced for less than two years, you must wait to apply for benefits based on your ex-spouse's earnings record until he or she starts receiving benefits.

If you delay receiving Social Security benefits, should you still sign up for Medicare at age 65?

Even if you plan on waiting until full retirement age or later to take your Social Security retirement benefits, make sure to sign up for Medicare. If you're 65 or older and aren't yet receiving Social Security benefits, you won't be automatically enrolled in Medicare Parts A and B.

You can sign up for Medicare when you first become eligible during your seven-month Initial Enrollment Period. This period begins three months before the month you turn 65, includes the month you turn 65, and ends three months after the month you turn 65.

The Social Security Administration recommends contacting them to sign up three months before you reach age 65, because signing up early helps you avoid a delay in coverage. For your Medicare coverage to begin during the month you turn 65, you must sign up during the first three months before the month you turn 65 (the day your coverage will start depends on your birthday). If you enroll later, the start date of your coverage will be delayed. If you don't enroll during your Initial Enrollment Period, you may pay a higher premium for Part B coverage later. Visit the Medicare website, www.medicare.gov to learn more, or call the Social Security Administration at 800-772-1213.

Will a retirement pension affect your Social Security benefit?

If your pension is from a job where you paid Social Security taxes, then it won't affect your Social Security benefit. However, if your pension is from a job where you did not pay Social Security taxes (such as certain government jobs) two special provisions may apply.

The first provision, called the government pension offset (GPO), may apply if you're entitled to receive a government pension as well as Social Security spousal retirement or survivor's benefits based on your spouse's (or former spouse's) earnings. Under this provision, your spousal or survivor's benefit may be reduced by two-thirds of your government pension (some exceptions apply).

The windfall elimination provision (WEP) affects how your Social Security retirement or disability benefit is figured if you receive a pension from work not covered by Social Security. The formula used to figure your benefit is modified, resulting in a lower Social Security benefit.

Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Why don’t you have a pension?

When it comes to choosing a retirement plan, there are several options we have to choose from, but many of us forget or are unaware that we can have almost all of them and not be held to just one or two plans. In fact, I recommend you have at least five types of retirement plans. But, how do you know which ones are right for you? That is something we look at on an individual level with each of our clients because there are many factors that will determine what plans are best for you so  if you are not working with an advisor to help you select these plans based on your needs, family, risk tolerance, tax rate, age, etc. then you are not set up properly for retirement.

Sadly, one of my favorite retirement plans is slowly fading away, the pension plan. A pension plan, according to Investopedia.com, is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.

This means that retirees would be able to receive this money guaranteeing lifetime income, in almost all cases, as long as the employer is in business. It all changed in the early 1980’s when companies started introducing the 401(k) plans named after the IRS code of The Revenue Act of 1978 which allowed employees to put money aside for retirement on a tax deferred basis and was meant as a supplement to the pension plans and Social Security. However, companies saw this as an opportunity to reduce and eliminate pension plans over the years saving themselves from paying retirees a salary for the rest of their lives.  When the 401(k) plans were introduced, we were in a high interest rate market so it made sense to defer taxes to a later period of time when interest rates came down. Now we are at historically low interest rates, does it make sense to defer taxes to a later period of time?

Most employees enter the workforce today with knowledge of one or two types of retirement plans. The 401(k) or the 403(b) plan that their company offers allows you to contribute as the company may offer matching contributions. Rarely are the employees educated by their employer on other types of retirement plans available to them or whether they are a good fit. Another type of retirement plan, the IRA (Traditional and Roth) is also commonly known to many employees but usually only after they have left a previous employer and was told to “rollover their 401(k) into an IRA” or they may be instructed to fund one at the advice of their tax advisor or accountant. Many workers have both a 401(k) plan with their current employer and an IRA from their previous employer, and there is usually nothing wrong with that. However, neither can guarantee that you will not run out of money before you pass away like a pension does, and you may end up paying more taxes.

So what can you do? You can actually create your own pension plan using your own money. Where many advisors will tell you how much money you need to retire, we at Thrive do not do it that way because we know that number may not be enough and it has a finite end to it. Contact us today to find out how we are different and how you can create strategies to help you avoid the possibility of running out of money and create your five retirement plans.       

484-206-4200

800-516-5861

Four Lessons Grandparents and Grandchildren Can Learn Together

If you're a grandparent, maintaining a strong connection with your grandchildren is important, but that may become harder over the years as they leave for college or become busier building their careers and families. While they're just starting out financially, you have a lifetime of experience. Although you're at opposite ends of the spectrum, you have more in common than you think. Focusing on what you can learn together and what you can teach each other about financial matters may help you see that you're not that different after all.

1. Saving toward a financial goal

When your grandchildren were young, you may have encouraged them to save by giving them spare change for their piggy banks or slipping a check into their birthday cards. Now that they're older, they may have trouble saving for the future when they're focused on paying bills.

They may want and need advice, but may not be comfortable asking for it. You're in a good position to share what experience has taught you about balancing priorities, which may include saving for short-term goals such as a home down payment and long-term goals such as retirement. You'll also learn something about what's important to them in the process.

You may even be willing and able to give money to your grandchildren to help them target their goals. While you can generally give up to $14,000 per person per year without being subject to gift tax rules, you may want to explore the idea of offering matching funds instead of making an outright gift. For example, for every dollar your grandchild is able to save toward a specific goal, you match it, up to whatever limit you decide to set. But avoid giving too much. No matter how generous you want to be, you should prioritize your own retirement.

2. Weathering market ups and downs

Your grandchildren are just starting out as investors, while you have likely been in the market for many years and lived through more than one challenging economic climate. When you're constantly barraged by market news, it's easy to become too focused on short-term results; however, the longer-term picture is also important. As the market goes up, novice investors may become overly enthusiastic, but when the market goes down they may become overly discouraged, which can lead to poor decisions about buying and selling. Sharing your perspective on the historical performance of the market and your own portfolio may help them learn to avoid making decisions based on emotion. Focusing on fundamentals such as asset allocation, diversification, and tolerance for risk can remind you both of the wisdom of having a plan in place to help you weather stormy market conditions.

3. Using technology wisely

Some people avoid the newest technology because they think the learning curve will be steep. That's where your grandchildren can help. With their intuitive understanding of technology, they can introduce you to the latest and greatest financial apps and opportunities, including those that may help you manage your financial accounts online, pay your bills, track investments, and stay in touch with professionals.

Unfortunately, as the use of technology has grown, so have scams that target individuals young and old. Your grandchildren might know a lot about using technology, but you have the experience to know that even financially savvy individuals are vulnerable. Consider making a pact with your grandchildren that if you are asked for financial information over the phone, via email, or online (including account or Social Security numbers); asked to invest in something that promises fast profits; or contacted by a person or business asking for money, you will discuss it with each other and with a trusted professional before taking action.

4. Giving back

Another thing you and your grandchildren might have in common is that you want to make the world a better place.

Perhaps you are even passionate about the same special causes. If you live in the same area, you might be able to volunteer together in your community, using your time and talents to improve the lives of others. But if not, there are plenty of ways you can give back together. For example, you might donate to a favorite charity, or even find the time to take a "volunteer vacation." Traveling together can be an enjoyable way for you and your grandchildren to bond while you meet other people across the country or globe who share your enthusiasm. Many vacations don't require experience, just a willingness to help--and learn--something you and your grandchildren can do together.

Broadridge Investor Communication Solutions, Inc. Copyright 2015.

Common Financial Wisdom: Theory vs. Practice

In the financial world, there are a lot of rules about what you should be doing. In theory, they sound reasonable. But in practice, it may not be easy, or even possible, to follow them. Let's look at some common financial rules of thumb and why it can be hard to implement them.

Build an emergency fund worth three to six months of living expenses

Wisdom: Set aside at least three to six months worth of living expenses in an emergency savings account so your overall financial health doesn't take a hit when an unexpected need arises.

Problem: While you're trying to save, other needs--both emergencies and non-emergencies--come up that may prevent you from adding to your emergency fund and even cause you to dip into it, resulting in an even greater shortfall. Getting back on track might require many months or years of dedicated contributions, leading you to decrease or possibly stop your contributions to other important goals such as college, retirement, or a down payment on a house.

One solution: Don't put your overall financial life completely on hold trying to hit the high end of the three to six months target. By all means create an emergency fund, but if after a year or two of diligent saving you've amassed only two or three months of reserves, consider that a good base and contribute to your long-term financial health instead, adding small amounts to your emergency fund when possible. Of course, it depends on your own situation. For example, if you're a business owner in a volatile industry, you may need as much as a year's worth of savings to carry you through uncertain times.

Start saving for retirement in your 20s

Wisdom: Start saving for retirement when you're young because time is one of the best advantages when it comes to amassing a nest egg. This is the result of compounding, which is when your retirement contributions earn investment returns, and then those returns produce earnings themselves. Over time, the process can snowball.

Problem: How many 20-somethings have the financial wherewithal to save earnestly for retirement? Student debt is at record levels, and young adults typically need to budget for rent, food, transportation, monthly utilities, and cell phone bills, all while trying to contribute to an emergency fund and a down payment fund.

One solution: Track your monthly income and expenses on a regular basis to see where your money is going. Establish a budget and try to live within your means, or better yet below your means. Then focus on putting money aside in your workplace retirement plan. Start by contributing a small percentage of your pay, say 3%, to get into the retirement savings habit. Once you've adjusted to a lower take-home amount in your paycheck (you may not even notice the difference!), consider upping your contribution little by little, such as once a year or whenever you get a raise.

Start saving for college as soon as your child is born

Wisdom: Benjamin Franklin famously said there is nothing certain in life except death and taxes. To this, parents might add college costs that increase every year without fail, no matter what the overall economy is doing. As a result, new parents are often advised to start saving for college right away.

Problem: New parents often face many other financial burdens that come with having a baby; for example, increased medical expenses, baby-related costs, day-care costs, and a reduction in household income as a result of one parent possibly cutting back on work or leaving the workforce altogether.

One solution: Open a savings account and set up automatic monthly contributions in a small, manageable amount--for example, $25 or $50 per month--and add to it when you can. When grandparents and extended family ask what they can give your child for birthdays and holidays, you'll have a suggestion.

RULE OF 100

Subtract your age from 100 to determine your stock percentage

Wisdom: Subtract your age from 100 to determine the percentage of your portfolio that should be in stocks. For example, a 45-year-old would have 55% of his or her portfolio in stocks, with the remainder in bonds and cash.

Problem: A one-size-fits-all rule may not be appropriate for everyone. On the one hand, today's longer life expediencies make a case for holding even more stocks in your portfolio for their growth potential, and subtracting your age from, say, 120. On the other hand, considering the risks associated with stocks, some investors may not feel comfortable subtracting their age even from 80 to determine the percentage of stocks.

One solution: Focus on your own tolerance for risk while also being mindful of inflation. Consider looking at the historical performance of different asset classes. Can you sleep at night with the investments you've chosen? Your own peace of mind trumps any financial rule.

Broadridge Investor Communication Solutions, Inc. Copyright 2015.

The Crisis in Retirement Planning

If you are an employee or an employer, this is something you need to pay specific attention to because they path we are on is leading to retirement destruction, but we can still make a change. It all started with the introduction of Internal Revenue Code 401(a) which introduced us to such retirement plans as 401(k), 403(b) and 457(b) plans. When they were created, they were to be a great supplement to the pension plans where the employees has control over where the money would be invested. As it turns out, pension plans have all but disappeared, and most employees are left with just one of the retirement plans under the IRC 401(a). What we have learned since the 1980's is that the stock and bond market that forms the investment vehicle of these plans, have become unpredictable and unstable. Add to it the lack of education provided to the employees about basic investing, and an increase in trading volume leading to volatility via many inexperienced traders having access to the internet to "day-trade". We live in a different world now and none of us can afford risking our retirement which may result in outliving our money.  The dollar amount of your retirement fund is not a number you can predict and there shouldn't be a number as your retirement goal. What is important is how much you can receive every month for the rest of your life and your spouse's life guaranteed to never run out. That is what a pension is (was). Your employer would guarantee that the employees would receive a specific amount of money upon retirement for the rest of their life.

So, in 2016 can you have the best of both worlds, a 401(k) and a pension even if your company does not offer it?

YES YOU CAN!

Contact us today to find out how you can create your own pension plan and how much money it would guarantee you to receive as long as you live.

To read more about the Crisis in Retirement Planning, click here 

Resolving Projected Income Shortfalls: Bridging the Gap

What is a projected income shortfall?

When you determine your retirement income needs, you make your projections based on the type of lifestyle you plan to have and the desired timing of your retirement. However, you may find that reality is not in sync with your projections and it looks like your retirement income will be insufficient for the rate you plan to spend it. This is called a projected income shortfall. If you find yourself in such a situation, finding the best solution will depend on several factors, including the following:

• The severity of your projected shortfall
• The length of time remaining before retirement
• How long you need your retirement income to last

Several methods of coping with projected income shortfalls are described in the following sections.

Delay retirement

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings.

What it means

Delaying your retirement could mean that you continue to work longer than you had originally planned. Or it might mean finding a new full- or part-time job and living off the income from this job. By doing so, you can delay taking Social Security benefits or distributions from retirement accounts. The longer you delay tapping into these sources, the longer the money will last when you do begin taking it.

While you might hesitate to start on a new career path late in life, there may actually be certain unique opportunities that would not have been available earlier in life. For example, you might consider entering the consulting field, based on the expertise you have gained through a lifetime of employment. This decision may involve tax issues, so it may be beneficial to review its tax impact with a tax professional.

Effect on Social Security benefits

The Social Security Administration has set a "normal retirement age" which varies between 65 and 67, depending on your date of birth. You can elect to receive Social Security retirement benefits as early as age 62, but if you begin receiving benefits before your normal retirement age, your benefits will be decreased. Conversely, if you elect to delay retirement, you can increase your annual Social Security benefits. There are two reasons for this. First, each additional year that you work adds an additional year of earnings to your Social Security record, resulting in potentially higher retirement benefits. Second, the Social Security Administration gives you a credit for each month you delay retirement, up to age 70.

Effect on IRA and employer-sponsored retirement plan distributions

The longer you delay retirement, the longer you can contribute to your IRA or employer-sponsored retirement plan. However, if you have a traditional IRA, you must start taking required minimum distributions (and stop contributing) when you reach age 70½. If you fail to take the minimum distribution, you will be subject to a 50 percent penalty on the amount that should have been distributed. If you have a Roth IRA, you are not required to take any distributions while you are alive, and you can continue to make contributions after age 70½ if you are still working. Minimum distribution rules do not apply to money in qualified retirement plans until you reach age 70½ or retire (whichever occurs later), unless you own 5 percent or more of your employer.

Social Security, Taxes, Medicare...

The decision you make regarding how and when to claim your Social Security benefits will be among the most complex and largest financial decisions you will make in your lifetime; and now being informed has become more important than ever! Most individuals are completely unaware of a few little-known strategies capable of greatly increasing your lifetime benefits and your quality of life in retirement. We have found that many people do not consider their Marital Status, Taxes, Medicare, Required Minimum Distributions (RMD), and their Income Gap among others, when planning for their Social Security and retirement income. This is your opportunity to learn some crucial factors you should consider PRIOR TO APPLYING FOR SOCIAL SECURITY.

Get these questions answered:

• How to decide the best time to apply?
• How much income you can expect to receive?
• How to minimize taxes?
• How to coordinate benefits with your spouse?
• How working can effect your benefits?

Please join your hosts, Bret Elam and David Bezar of Thrive Financial Services, for this very informative, educational event. We welcome those who are at or nearing retirement to join us for an enlightening discussion on how to avoid some very common mistakes people make in signing up for Social Security benefits and get the most from your Social Security benefits. Learn how making one uninformed decision could potentially impact your retirement income by tens of thousands of dollars! Timing could be everything!

Retirement Planning: The Basics

You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical.

But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.

Determine your retirement income needs

It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses.

Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult.

Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.4 percent. (Source: Consumer price index (CPIU) data published by the U.S. Department of Labor, 2012.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap

Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save

By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

• At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.
• What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.
• What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return.
• Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.

Build your retirement fund: Save, save, save

When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal.

The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.

Understand your investment options

You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon. Note that many investments may involve the risk of loss of principal.

Use the right savings tools

The following are among the most common retirement savings tools, but others are also available.

Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. 401(k), 403(b) and 457(b) plans can also allow after-tax Roth contributions. While Roth contributions don't offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free.

IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable).

Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA.

Annuities are contracts issued by insurance companies. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company). Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees, and other charges.

Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).