financial adviser | by cindy richey

Getting Serious About Your Retirement Plan

It's not unusual to get a call out of the blue from someone who suddenly wants to sit down and take a good look at whether they are saving enough for retirement. I usually find that a significant event, such as a fortieth birthday, has triggered this sudden interest. If you're feeling a little insecure, it's a good idea to crunch the numbers to see where you stand. Here are some tips for you to consider in your planning.

Be realistic about your expectations A recent poll showed that investors younger than 40 expect returns for the next decade to average 21.9%. In reality, the average annual return of the Dow Jones Industrial Average from 1928 to 1999 was 10.5%. Over this time period, a 10-year average return of 21.9% has never occurred. It's just not realistic to take your best or most recent experience and project this into the future.

Take full advantage of pre-tax savings plans It's widely known that a company-sponsored savings plan, such as a 401(k), is a great way to save. Your contributions are not subject to income tax, which means your out-of-pocket cost is less than the amount you save. For example, assume you are in the 28% federal tax bracket and also pay 6% in state income tax. Your combined marginal tax rate is 34%. So putting $100 per month into your company savings plan only "costs" you $66 from your cash flow. Plus you have the convenience of payroll deductions and perhaps company matching contributions as well.

Use caution when switching jobs. A higher-paying job may be a great way to jump-start your savings plan, but look before you leap. First, you may find yourself stuck in a 6 to 12 month waiting period, or longer, before you can contribute to the new savings plan. Not only could your savings plan stall, but your taxes could be dramatically higher over this time period. Second, pay attention to what is known as the "vesting schedule" on the company retirement plan.

This is the number of years you must work before your employer's matching contributions are yours to keep. Matching contributions are great, but if you don't stay long enough to become vested, the value is diminished or lost all together. For example, if you've been with your company four years and you become fully vested after five years, you should strongly consider sticking it out a while longer.

Expect to pay for health care expenses People often believe that their living expenses will be lower in retirement than during their working years. That may not be the case once you factor in the cost of health insurance, prescription drugs and long-term health care. This is a difficult expense to plan for, because health-care inflation has greatly outpaced general inflation over time. It makes sense to look at a long-term care policy before you retire. Some policies have built-in benefit increases to protect you from inflation, yet the premium is designed to remain level over your lifetime. The cost of this protection is a bit more but it's easier to fit the premiums into your budget during working years and the cost will increase sharply the longer you wait.

Review your asset allocation If retirement is five or fewer years away, you may want to move a portion of your funds to lower risk investments. One approach is to keep the equivalent of five years' living expenses in safer investments and the rest in a combination of stocks and bonds. Of course, the funds you've accumulated will need to last 20 or even 30 years. With this long-term horizon, it still makes sense to keep a healthy part of your portfolio in a growth position.

Cindy Richey is a Certified Financial Planner and president of KCL Financial Group, Inc. She can be reached at 816.960.1290 or at crichey@kclfg.com.