January 26, 2005 | By: Ellen Brightwell

Time is the most valuable asset in retirement planning.

"People in their 20s should begin to consistently save and invest for retirement," said Sue Badenhop, Extension family resource management specialist in the University of Kentucky College of Agriculture. "The earlier people start, the easier the savings habit will be and the more their retirement accounts will grow."

She gave an example from the National Endowment for Financial Education. Assuming a 9-percent rate of return, someone who invests $2,000 a year only from age 20 through 30 will accumulate $579,471 in retirement funds available at age 65. However, someone who invests $2,000 a year from age 31 through 65 only will have $470,249.

Badenhop said people in their 20s should diversify retirement investments in seven to 10 funds to help minimize overall losses. People wanting more income growth may choose higher-risk investments in the beginning years. However, as retirement approaches, it is wise to re-evaluate allocations and move toward more income-producing investments such as dividend-paying stocks or bonds, and away from more risky choices.

"Look at your retirement income sources and develop a savings plan based on how much money you want to have when you retire," she said. "To maintain the same standard of living you had before retirement, some experts recommend an income equal to two-thirds of your pre-retirement income. You may need a higher percentage, perhaps three-fourths of pre-retirement income, if you plan to lead a different lifestyle. Inflation during retirement may consume some of your funds so the necessary dollar amount will have to be higher to have the same purchasing power."

Remember to include insurance needs because the proper policies can provide peace of mind in retirement.

She recommended signing up for the employer's retirement savings plan as soon as possible and contributing as much as possible, at least the amount necessary for the employer's matching contribution.

Contribute to an Individual Retirement Account if you are eligible. If it seems that you do not have the $2,000 for the annual contribution, consider making smaller contributions from each pay check. For instance, if you are paid weekly, putting $40 from each check into an IRA will provide the $2,000 in just 50 weeks.

It may be wise to talk to an accountant or investment advisor to determine whether it is better to have a traditional IRA or a Roth IRA. With a traditional IRA, you must take the minimum distribution, which is determined by the Internal Revenue Service, by age 70 and one-half years. This money is taxable and could put you into a higher income tax bracket. Since you already have paid taxes on contributions to a Roth IRA, withdrawals are not taxable. Also, a Roth does not have a required age distribution.

"Do your homework before deciding where and how to invest money for retirement and continue to do research and monitor these investments throughout your career," Badenhop said. "Internet sites and newspaper and magazine articles have information on planning, saving and investing for retirement. Financial magazines also have special 'retirement' issues.

"Careful planning and investing will help you have a smooth financial transition into retirement," she added. "Savings is a good step toward financial freedom in retirement. Choose the right accounts and investments to make the most of your financial funds. Whether you live the retirement of your dreams or of your nightmares will depend upon how far in advance and how well you plan for it."

Your local office of the Kentucky Cooperative Extension Service has additional information on planning for retirement.


Writer: Ellen Brightwell 859-257-4736, ext. 257
Sources: Sue Badenhop 258-257-1812