The good news is that you can expect to live for many years after you retire. That should be
sobering news, too. Once you’re retired you won’t receive anymore paychecks.
Nevertheless, the cost of living will continue to increase. If you assume a 3% inflation rate
(the average for the past 75 years), prices will double over a 24-year retirement.
Where will your retirement income come from? Some retirees can expect a lifetime pension from
a former employer but such pensions are becoming the exception, rather than the rule.
Social Security Shortfall
You will be able to collect Social Security retirement benefits as early as age 62. However, the
earlier you collect those benefits, the smaller your monthly check. At the same time, the age for
collecting full retirement benefits is being pushed back, from 65 to 67.
Even your “full” Social Security retirement benefit will replace only a fraction of your earned
income. What’s more, the Social Security system is projected to come under pressure, so some
combination of lower benefits and higher taxes is a probability.
Use the steps to save and invest for your golden years:
Fortunately, the federal government offers many ways for you to save for retirement, using tax
breaks created for this purpose.
Employer-sponsored retirement plans
Many employers provide their workers with retirement plans such as 401(k)s, 403(b)s, and 457s.
In these plans, you decide how much of your income to defer from today to some time in the
future. Often, your employer will make a matching contribution if you elect to participate. Money
that you contribute to such plans (as well as your employer’s matching contribution) won’t be
taxed immediately. Those funds will be invested, and any investment earnings also will be tax-free.
The money won’t be taxed until you withdraw it, and that may be after you retire and your
tax rate has come down. Therefore, if you are eligible you should make maximum contributions
to the retirement plan sponsored by your employer. Carefully consider your investment options
within the plan. Generally, you should spread your contributions among a mix of stock funds and
bond funds managed by experienced professionals.
NEW CONTRIBUTION LIMITS FOR EMPLOYER-SPONSORED RETIREMENT PLANS
(Including 401(k)s, 403(b)s, and Section 457 Plans)
Year Maximum Contribution
Maximum Contribution Including Catch-Up Provisions*
2004 $13,000 $16,000
2005 $14,000 $18,000
2006 $15,000 $20,000
*Those who reach age 50 by the end of the year can contribute an additional $2,000 in 2003, $3,000 in 2004, $4,000
in 2005 and $5,000 in 2006.
Source: www.irs.gov
Individual Retirement Accounts
Whether or not your employer sponsors a retirement plan, you and your spouse can contribute
to an Individual Retirement Account (IRA) throughout your working years. In 2003 and 2004,
the maximum contribution is $3,000 per year. For those who are at least 50-years-old, the max-imum
is $3,500.
To Commit To A Program Of Retirement Planning
PRINCIPLE NO. 3
12
T
Declaration of Financial Empowerment
steps
PRINCIPLE no.3
13
And Investing
Both you and your spouse should contribute the maximum to IRAs each year. Inside an IRA, the
investment earnings won’t be taxed until the money is withdrawn. If your income is below cer-tain
limits or if you don’t participate in an employer’s plan, your IRA contributions can be
deducted from your taxable income.
BEYOND TRADITIONAL IRAS
Other types of IRAs may prove to be valuable in your retirement planning:
■Rollover IRAs. When you retire or change jobs, you can transfer your account from an
employer-sponsored retirement plan to an IRA. This “rollover,” as it’s known, maintains the
account’s tax deferral. From then on, you are responsible for directing the investments within
your IRA. After you retire, you can tap your IRA for living expenses. However, you must be
careful not to withdraw too much, too soon, or your account may become depleted. With careful
planning, an IRA can provide life-long cash flow for you and perhaps for a surviving spouse as
well.
■Roth IRAs. Instead of contributing to a traditional IRA each year, as described above, you
may contribute to a Roth IRA. (Roth IRAs are not open to high-income taxpayers, though.)
Roth IRA contributions are never tax-deductible. However, after five years and after age 59
1
⁄2 ,
you can withdraw money from your Roth IRA, tax-free. In addition, a traditional IRA can be
converted to a Roth IRA. (Again, there are income limits.) You would have to pay the deferred
income tax at the time of the conversion. After five years, and after age 59
1
⁄2 , your Roth IRA
becomes a completely tax-free investment account.
■Annuities. Another type of retirement investment enjoys favorable tax treatment. You can
put money into deferred annuities, which are available through many financial institutions. As the
name indicates, taxes are deferred until money is withdrawn.
■Fixed annuities. With these annuities, the issuer promises you a certain return for a specific
time period. After that term, you’ll receive a rate that’s based on current market conditions. Your
principal keeps increasing and no tax will be due until money is withdrawn.
A fixed annuity may be right for you if:
■You’re concerned about market volatility
■You’re looking for a guarantee that your money will be there for you when you
need it most—at retirement
■You have a variety of investments and are looking to diversify into conservative
investments
Source: Phoenix Wealth Management
www.phoenixwm.phl.com
MAXIMUM IRA CONTRIBUTIONS
Tax Year Contribution Limit Contribution Limit
if Under Age 50 if Age 50 or Over
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 $5,000 $6,000
Source: www.aigvalic.com

■Variable annuities. These annuities allow you to divide your outlays among several invest-ment
accounts. Any growth will be tax-free. You may enjoy exceptional returns if your
investments perform well, but you also bear the risk of disappointing results.
Proceed with caution
Deferred annuities have a great deal of appeal and they are extremely popular. However, you
probably should not buy any annuity until after you have contributed as much as you can to an
employer-sponsored plan and an IRA. If you have excess funds to invest for your retirement,
consider a deferred annuity but keep these points in mind:
■Early withdrawal penalties. If you take money from a deferred annuity before age 59
1
⁄2 ,
you’ll incur a 10% penalty tax. That’s in addition to the ordinary income tax you’ll owe.
(A similar 10% penalty for most withdrawals before age 59
1
⁄2 also applies to IRAs, 401(k)s,
and other retirement plans)
■Surrender charges. Most deferred annuities impose additional fees if you take money out
during the first several years of the contract. Therefore, when you buy an annuity you should
feel comfortable that you can leave the money untouched until after age 59
1
⁄2 and after the sur-render-
charge period.
■Fees. You’ll have to pay a variety of other costs for purchasing and carrying a deferred
annuity. There are great differences in fees among the different issuers though, so you can save
money by shopping around.
Waiting game
If you purchase a deferred annuity, you should plan to hold onto it for an extended time period.
The longer the holding period, the greater the value of the tax deferral. Eventually, you may
want to “annuitize” the contract. That is, you can convert your account into a life-long income
stream. Some of that income will be taxable and some will be a tax-free return of your invest-ment.
What’s more, the tax you’ll owe on the taxable portion may be reduced if you have
retired and your tax rate has dropped.
Invest independently
Buying a deferred annuity is just one option to consider for building up a retirement fund, once
you have fully funded your IRA and your 401(k). In truth, there are a wide variety of invest-ment
vehicles to choose among.
■Full-service brokerage firms. Yesterday’s stockbroker has become today’s “financial
advisor” or “financial consultant,” ready to help you with all of your investment concerns,
including retirement. You’ll need to pay for such advice though, so investigate before you
make any commitments. Ask trusted friends and relatives for leads to outstanding advisors.
To Commit To A Program Of Retirement Planning
PRINCIPLE NO. 3
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Declaration of Financial Empowerment
THE CASE FOR VARIABLE ANNUITIES:
■There is no annual contribution limit, unlike IRAs or 401(k)s.
■You don’t have to report undistributed earnings. In other words, you will not receive
a 1099 unless you make a distribution.
■You can fund annuities in a lump sum or over time—whatever is best for your wallet.
■You have a tax deferred way to invest your money now for future income.
Source: GE Financial

■Discount brokerage firms. If you’d rather do your own investment research and not pay for
advice, you can use a discount broker instead. Trading fees are much lower when you invest in
the stock market, but you can’t expect much in the way of retirement planning. Most discoun-ters
now offer extremely low fees and rapid execution of transactions via the Internet, for clients
who have established trading accounts. Indeed, using the Internet is an excellent way of
researching possible investments before you buy.
■Mutual funds. If you’d rather not pick your own stocks and bonds, you can invest through
mutual funds. Each fund has a manager or managers to make the selections for you. Because
mutual funds hold many different securities, your nest egg won’t be exposed to a tremendous
loss from the failure of one company. There are many different types of mutual funds to choose
among. Recently, some leading mutual fund companies have introduced “target maturity” funds
pegged to projected retirement dates. When you’re far from retirement, these funds will invest
heavily in stocks, where long-term results may be greatest. As you near retirement, these funds
will shift into safer, income-producing bonds.
Automatic pilot
No matter how you save for retirement, discipline is vital. You need to invest regularly so you
can build up a sizable fund over the years. If you participate in an employer-sponsored retire-ment
plan such as a 401(k), your contributions will be withheld regularly from your paychecks
and deposited into the retirement plan. The same procedure can be followed for other invest-ments.
You can arrange for specific accounts to be transferred regularly from your paycheck or
from your bank account to your brokerage account, mutual fund company, or some other finan-cial
firm. Those payments can buy shares of stocks or funds that you have selected. This
technique automatically builds up your retirement accounts, making it easy to consistently save
for your future.
resources
Websites:
www.401khelpcenter.com
www.bwnonline.com
Books:
Retirement Bible, by Lynn O’Shaughnessy
Roth to Riches: The Ordinary to Roth IRA Handbook,
by John D. Bledsoe
Becoming an Investor: Building Wealth by
Investing in Stocks, Bonds, and Mutual Funds,
by Peter I. Hupalo
Fund Your Future,
by Julie Stav & Lisa Rojany-Buccieri
1,001 Ways to Save, Grow, and Invest Your Money,
by David E. Rye
You’re Fifty—Now What? Investing for the
Second Half of Your Life, by Charles R. Schwab
The New IRAs and How to Make Them Work for You,
by Neil Downing
Protect Your Retirement Plan
Through Global Investing, by Martin Schuster
Essential Finance: IRA and 401(k) Investing,
by Dallas Salisbury & Marc Robinson
Retire Early Sleep Well: A Practical Guide to Modern
Portfolio Theory and Retirement in Plain English,
by Steven R. Davis
Organizations:
The American Association of Individual Investors;
800-428-2244; www.aaii.com
The National Association of Investors Corporation;
877-275-6242; www.better-investing.org
Alliance for Investor Education;
703-276-1116; www.investoreducation.org
American Savings Education Council;
202-659-0670; www.asec.org
National Endowment for Financial Education;
303-741-6333; www.nefe.org
Women’s Institute for Financial Education;
760-736-1660; www.wife.org
PRINCIPLE no.3 And Investing
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