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Asset Allocation

Often financial "experts" make asset allocation difficult to understand. My goal in this series of articles is for you to understand asset allocation thoroughly, in an easy to understand format.
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Your Financial Savings Plan Made Simple

Colleen Mulder-Seward, MBA
Retirement Calculator, Inc.
Your Financial Savings Plan Made Simple

The greatest ally for workers saving toward retirement is time.  The more time you have before you retire, the more time your investments have to grow. Getting a late start does not mean that you can not meet your retirement goals.  You are not alone, according to a Federal Reserve data-based economic analysis commissioned by the Consumer Federation of American (CFA) and Direct Advice, more than half of American households (56 percent) are behind where they should be in saving for a comfortable retirement. This article will help you to plan your savings to meet your dreams of a comfortable retirement.

Every penny you save and invest helps to ensure your secure retirement.  Sources of retirement income include: Social Security, pension, Individual Retirement Accounts (IRAs) and workplace savings accounts (401(k)s, 403(b)s, and 457 plans and SIMPLE IRAs.)  Most financial planners suggest that retirees will need at least 75 percent of their pre-retirement pay, to ensure a comfortable retirement. 

Many Americans mistakenly believe that Social Security will account for the majority of their retirement income.  But, from the U.S. Government's own Social Security web site.  "Under current law, if you have average earnings, your Social Security retirement benefits will replace only about 40 percent, so you'll need to supplement your benefits with a pension, savings or investments."  This assumes, of course, that Social Security is secure and will be around throughout your entire retirement.  Pensions are scarce, and if you are one of the lucky ones to have a pension, these are becoming less secure.  Just ask any United Airlines worker.

Thus, in order to have your dreams of a comfortable retirement come true, you must also invest.  Workplace savings accounts and Individual Retirement Accounts are the means to bolster any retirement shortfall your plan may have. A special provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 allows investors age 50 and over to make "catch-up" contributions to workplace savings accounts, including 401(k)s, 403(b)s, and 457 plans and SIMPLE IRAs, if allowed by your employer. The tables below shows the current "catch-up" contribution limits imposed by the IRS.

401(k) Plans

Year 

Contribution Limit

Catch-up Contribution Limit

50+ Total Contribution Limit

2005

$14,000

$4,000

$18,000

2006

$15,000

$5,000

$20,000

After 2006

The maximum pre-tax contribution limit will be indexed for inflation, in $500 increments.

Limits will be increased in $500 increments, as dictated by cost of living adjustments (COLAs).

 

 

403(b) Plans

Year 

Elective Deferrals Limit

 15-Year Rule? Limit

Maximum Amount Contributable (MAC) Limit

Catch-up Contributions Limit

Total Limit for those 50+ with 15+ years

2005

$14,000

$3,000*

$17,000

$4,000**

$21,000

2006

$15,000

$4,000

$18,000

$5,000

$24,000

* If you have at least 15 years of service with the employer maintaining your 403(b) account, the limit on elective deferrals to your 403(b) account is increased.  The limit on elective deferrals is increased by the least of (1) $3,000, (2) $15,000, reduced by increases to the general limit you were allowed in earlier years because of this rule, or (3) $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

**The maximum amount of catch-up contributions is the lesser of $4,000 for 2005 or your includible compensation minus your other elective deferrals for the year.

 

SIMPLE IRAs

Year 

Contribution Limit

Catch-up Contribution Limit

50+ Total Contribution Limit

2005

$10,000

$2,000

$12,000

2006

$10,000

$2,500

$12,500

After 2006

The maximum contribution limit will be indexed for inflation, in $500 increments.

Limits will be increased in $500 increments, as dictated by cost of living adjustments (COLAs).

 

 

457 plans

Year 

Contribution Limit

Catch-up Contribution Limit

50+ Total Contribution Limit

2005

$14,000

$4,000

$18,000

2006

$15,000

$5,000

$20,000

After 2006

The maximum pre-tax contribution limit will be indexed for inflation, in $500 increments.

Limits will be increased in $500 increments, as dictated by cost of living adjustments (COLAs).

 

 

Individual Retirement Accounts (IRAs)

Year

Contribution Limit*

Catch-up Contributions Limit

Total Limit for those 50+ years

2005

$4,000

$500

$4,500

2006

$4,000

$1,000

$5,000

2007           

$4,000

$1,000

$5,000

2008

$5,000

$1,000

$6,000

2009

$5,000

$1,000

$6,000

*The smaller of amount shown or your taxable compensation for the year.  This amount may be further reduced by modified AGI limits imposed by the IRS.   Source: IRS Publication 590

Whether you are three months, three years, or 30 years away from retirement, it is never too early, or late, to start planning. By starting to save now, you can make a big difference in how comfortable your retirement will be.   You have worked hard for what you have; you deserve to make your dreams of a comfortable retirement a reality.

How do I keep up-to-date on the latest news impacting my retirement?

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