6. Have I Estimated How Long My Resources Will Last?

In order to estimate how much retirement income you’ll have and how long it will last, you’ll need to make some thoughtful assumptions about matters that include the following:

• Time until retirement: How many more earnings years will you have before you begin receiving retirement benefits and/or Social Security benefits. Can you take advantage of catch-up provisions?
• Life expectancy: You need to estimate your ability to be financially independent for a long life. While life expectancy tables can be helpful, they don’t always tell the whole story. Consider your health and your partner’s health, as well as the life spans of your parents and grandparents. We know that life spans have gotten considerably longer over the years and that most people today can expect to live several years longer than their grandparents did. Plan accordingly.
• Rate of inflation: Experts suggest a reasonable inflation assumption is 3 to 3.5 percent.
• Rate of investment return: It is best to assume a reasonable but conservative investment return consistent with your own investment choices, ranging from 4 to 7 percent.

When you have given some thought to each of the assumptions above, use the Gap Analysis calculator as a quick check on whether you have saved enough for retirement. For a more comprehensive review of where you stand consult a professional.

Closing The Gap On What You’ll Need In Retirement

Your estimate may show that some adjustments to your retirement objectives are needed to ensure that your goals are realistic and attainable. If your shortfall is significant, it may be beneficial to continue working a bit longer or to find part-time employment for the first few years of retirement. The financial benefits from delaying retirement, by working even a little longer, can be significant.

Another option that is becoming more common is starting a new career or working part time during retirement. The added income might increase eventual Social Security payments. Not starting this benefit before normal Social Security retirement age avoids a benefits reduction for early retirement. Health care benefits might be available from the employer. Tax-deferred retirement savings can continue, and retirement savings already in place can grow for a longer period. There is more time, and income, to pay down debt before full retirement.

There may be other ways to address a retirement income gap as well:

• Look at your total assets. Are there assets available that you can use to help meet retirement income needs, such as realizing part of the equity in your home (if you plan to purchase a less expensive retirement home) or cash value of life insurance?
• Examine how your investment portfolio is allocated. Could you invest some of your savings in ways that may improve your long-term rate of return consistent with your personal risk tolerance?
• Review your current spending. Most of us can save more than we think, especially if we commit to a regular payroll investment plan.
• Review your retirement budget estimate. Are there expenses you have over- or underestimated? Are there ways to economize in retirement?
• Check your retirement income estimate. Have you included both spouses’ pensions and Social Security?

After you have reached the maximum contribution level in your 457 plan, consider other tax-deferred investment vehicles. Although IRAs may not be pretax for you, the income is deferred and, in the case of a Roth IRA, may be entirely tax-free.

Am I Maximizing Contributions While Still Working?

The final years before you retire are a great opportunity to save even more for your retirement. Federal law allows increased tax advantaged contributions close to retirement, and your financial situation may allow you to save more than in earlier years. These years may be your last chance to save tax deferred before retirement. The following is an overview of the options that may be available to you. For detailed information, contact ICMA-RC Investor Services.

Participating in the 457 Catch-up

With the 457 catch-up, you may be able to make additional contributions to help make up for years when you didn’t contribute the maximum. If requirements are met, your total tax-deferred contributions to a 457 plan may be as high as $30,000 for each of the three years prior to the year of retirement eligibility.

Participating in the Age 50 Catch-up

Since the passing of tax reform legislation in 2001, participants who are or who turn age 50 or older in a calendar year may be eligible to contribute to their employer-sponsored savings plan an amount greater than the regular contribution limit. For 2008, the age 50 catch-up amount is $5,000 in addition to the contribution limit of $15,500, for a total potential pretax contribution amount of $20,500.

Investing in an IRA

In addition to your retirement savings plan at work, while you have earned income, you may contribute to an IRA. Both you and your spouse may be able to invest in an IRA, further increasing your retirement savings.

An important consideration in deciding what type of IRA to use is the tax consequences of withdrawing money from it later. Money taken from some IRAs may be fully taxable, others partially taxable, and still others could be tax-free.

The two most common types of IRAs you may choose to contribute to are traditional and Roth IRAs. Contributions to a traditional IRA may be partially or fully deductible, depending on your adjusted gross income and eligibility to participate in a retirement plan at work. Taxation of money withdrawn from a traditional IRA depends on whether and how much of the principal, if any, was contributed pretax.

If your adjusted gross income falls below limits established by law, you might choose a Roth IRA. Although Roth contributions are always after tax, earnings are tax-free if the account is at least five years old and you withdraw funds after age 59½.

ICMA-RC can help you determine which IRA investment vehicle is right for you and your partner.