April 18, 2012 - As with most things in life, it's never too early to plan. And even if you are not at the doorstep of retirement, there are some critical dos and don'ts related to retirement planning, that anyone could benefit from.
"While not a full-blown retirement planning strategy, we're offering these tips with one goal in mind: helping Americans achieve a more secure retirement," says Robert Fishbein, a tax planning expert at Prudential Financial, Inc.
1. Don't think of your home as a retirement asset.
Whether you are a new homeowner or near retirement, you should not think about your home as a retirement asset, for these reasons:
* A home is, first and foremost, a place to live, and you will always need a place to live.
* Your home is an inherently un-diverse investment.
* A home may be subject to debt, which means it is less valuable than it appears and could be an ongoing expense when living in retirement.
* Relying on a home as retirement savings tends to discourage other saving.
2. Don't think maximizing investment return is a savings plan.
Maximizing investment return is an important focus of retirement planning. However, sometimes we fall into the trap of seeking outsized returns to compensate for our failure to save consistently over time. There is no substitute for disciplined and regular saving.
3. Do maximize Roth assets.
A Roth IRA or 401(k) can provide tax-free income, if you hold the account for 5 years and have attained age 59 1/2. Roth IRAs also have the added benefit of being exempt from the tax rules requiring distributions starting at age 70 1/2.
Prior income limits on converting a traditional IRA or 401(k) to a Roth IRA were eliminated in 2010, which makes these unique retirement planning products more broadly available. Of course, converting a non-Roth retirement asset into a Roth retirement asset triggers recognition of the tax gain on the converted value.
4. Do have a retirement income plan.
Some financial professionals suggest 80 percent of your pre-retirement income is a good retirement income goal. With this goal you can then compare your expected monthly retirement income from Social Security and any pension plan to your target monthly retirement income amount. Any shortfall is the amount you will need to make up each month by tapping your other savings. Also consider an annuity contract from a life insurer to provide additional guaranteed lifetime income, which will both cover more of your target retirement income and manage the risks that you invest poorly or live longer than expected.
5. Do plan for inflation and increasing health care costs.
Inflation and health care costs are twin traps that can erode the value of your retirement plan if you do not consider and plan for them. One strategy is to calculate a more modest income at the beginning of retirement and then increasing the income amount each year by the inflation rate (or a rough proxy such as 3 percent).
6. Do maximize Social Security as insurance protection.
For most Americans the decision to defer Social Security payments as long as possible is an important action to ensure not outliving one's assets. Social Security is typically a large source of retirement income, and its value is enhanced because it is government guaranteed and provides inflation-adjusted payments.
7. Do stress test your retirement plan.
The 2008 economic recession gave rise to bank bailouts and, in turn, the stress testing of banks to ensure ongoing viability. This thinking can and should also be applied to your retirement planning. For example, how would your retirement plan work if your investments grow at 3 percent a year instead of 8 percent? What if your income declines over time?
Stress testing your retirement plan could suggest you change your planning assumptions. You might decide to work longer, which reduces the number of years that you will need your retirement assets to support you. Other adjustments that you can make include saving more now, changing the risk profile of your investments, and buying products with a lifetime income guarantee so you are less exposed to market risk and the risk that you will live longer than expected.