Principles of Retirement Planning/Starting Out

D e l o i t t e & T o u c h e L L P

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STARTING OUT

Seek Qualified Financial Advisors as Appropriate

Understand Investments and Investment Allocation

Understand the Impact of Income Taxes

Whether you are getting started in your career, accumulating cash, or positioning yourself for retirement, now is the time to take control of your money. This is the only way most people can accomplish their short-term and long-term goals. People who fail to take control their money do not attain their goals or are forced to attain them in another manner -- by winning the lottery, inheriting a fortune or general good luck.

Understanding your options and making informed decisions now can add thousands of dollars to your retirement nest egg. Your financial future will be much smoother if you take an active role in managing and planning your finances now. In fact, your decisions -- or lack of decisions can make you or break you.

Understand Your Employer's Benefits

When you begin your career, your employer will provide you with a summary of the benefits that are available to you. These benefits may include qualified and non-qualified retirement benefits, medical and dental benefits, life insurance, disability insurance, flexible spending accounts, and savings plans.

Some benefits require you to make important choices that can affect you and your family (e.g., how much life insurance do I want?) Other benefits are provided as part of your employment, such as your employer-provided pension.

Some benefit choices give you the option to reduce your current income to make "pre-tax" contributions to a retirement plan for child care expenses or for uninsured medical and dental expenses.

Generally, you will have some benefit choices which can be changed, usually on an annual basis. Other choices may be irrevocable as long as you remain with that particular employer or as long as the terms of the particular employee benefit plan stay the same.

These benefits can have an impact on the amount of money you have to spend, the amount of money you need to have available in an emergency fund to cover unanticipated expenses such as medical insurance deductibles, and the amount of money you need to save for retirement.

Seek Qualified Financial Advisors as Appropriate

Depending on your background and how much time you have (or want to allocate) to educate yourself on the available financial options, you may want to seek qualified financial advisors. For example, if you have various investment alternatives in your retirement plan and you don't know the basics about the trade-off between risk, reward and your time horizon, there is a good chance you will make an investment decision which could have a negative impact your financial future. You could select any number of bankers, stockbrokers, financial planners or money managers to assist you in making a decision.

Before seeking any advice, be sure that you know how much the advice will cost. Be sure to find out whether your advisor charges a straight fee or whether he or she is paid through commissions on your investments, or some combination of fee and commission.

Understand Investments and Asset Allocation

Books have been written on investments and asset allocation. However, you don't need to be an investment expert to make sound decisions. Many of the so-called investment experts don't always have the right answer anyway. If they did, they wouldn't need to work.

When you are just starting out, you just have to understand the basics the trade-off between risk, reward, and your time horizon (how long you can invest your funds).

The investments that you will deal with at this stage are stocks, bonds, and cash or cash equivalents (such as certificates of deposit). As a general rule, stocks have historically outperformed bonds and cash equivalents over the longer holding periods (10, 15, and 20 years). However, as with anything in life, you have to accept additional investment risk if you are looking for a higher reward. The stock market can be very volatile -- especially if your time horizon is less than seven or eight years.

After stock, bonds generally outperform cash and cash equivalents over longer time periods. However, the bond market can also be very volatile as interest rates rise and fall. Although you will generally receive the funds you invested when the bond matures, this may not necessarily be true if you have to sell the bond before maturity.

If you expect to need the funds within a year or two, you may want to stick with cash and cash equivalents. Although you give up some investment return, you don't have to worry about losing any of the funds you have invested.

Asset allocation is the process of allocating your funds between stocks, bonds, and cash equivalents so that you maximize your investment returns based upon your income sources, your anticipated (and unanticipated) expenses, and your retirement goals.

Understand the Impact of Income Taxes

Although income tax laws are constantly changing, you should be able to project your annual federal and state income taxes. As a general rule, as your taxable income increases, so does the percentage of income tax that you will be paying.

Most people understand how income taxes affect them because taxes decrease their spendable income. What many people do not realize is how important it is to maximize pre-tax contributions to retirement plans and flexible spending plans for health and child care expenses.

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