Saving for Retirement: Personal Accounts

The foremost financial goal for most people is to secure a comfortable retirement. Have you thought about where your retirement income will come from?

One important source is your 401(k) or other qualified retirement plan. And then of course there's social security. But will that be enough?

Here's a good rule-of-thumb for estimating how much you'll need to save:

Pick a desired retirement income based on your current annual living expenses and multiply by 20.

If you can live comfortably on $50,000 per year, you'll need to save $1 million (50,000 x 20 = 1 million). If you need $150,000 per year, you should aim for $3 million in retirement savings. Of course, this is only a rough estimate. A more accurate estimate would take into account your unique personal and financial circumstances.

In order to reach your retirement savings goal, you will probably have to supplement your employer-based retirement plan. This requires opening a personal
investment account. An IRA or Roth IRA might serve this purpose, but they have strict annual contribution limits. A personal account, opened in your name or jointly with your spouse, can serve as an excellent supplemental retirement
account.

Unlike qualified retirement plans, there is no limit to the amount that you can contribute to a personal investment account. However, there are two problems with these accounts: they are subject to taxation and it requires discipline to fund them. The tax problem can curtailed by investing in tax-friendly securities such as low-dividend stocks, tax-managed mutual funds, and municipal bonds. A long-term buy-and-hold approach will also help minimize your tax liability.

The discipline part is up to you. There is an old financial planning adage that says "pay yourself first." This simply means that the first check you write each month should be the contribution to your investment account. Most financial institutions allow you to establish an automatic monthly deposit so that you don't even have to write the check.

If you don't already have a personal investment account, please look into it today. We would be happy to help.

June 1, 2002

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