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Nitesh Patel
Finance | Financial advice

By Nitesh Patel

If you’re saving for retirement, this could not be a better time. As a nation, we have two growing challenges:

Americans, and especially baby boomers, aren’t saving enough money to adequately fund their retirements. The Social Security system will have increased demands placed on it as baby boomers age.

In general, law changes raise contribution limits to allow savers to put more money away in IRA accounts and qualified retirement plans — places where investors can see their money grow tax-free until it’s withdrawn. Perhaps even more important, special “catch-up” provisions for people over 50 — a critical group nearing retirement age — allow even more saving.

While investors are pouring more and more money into retirement savings, they should also pay close attention to thoughtful retirement planning. Retirement savers should consider the following:

How and where your money is invested

As retirement assets grow to substantial sums, make sure your investments are as efficient and effective as possible. Are you in a tax bracket that makes tax-free investments more attractive? Are your investments appropriate for your investment horizon? Based on your investment allocation, are you saving enough for retirement in order to have the lifestyle you hope for? You don’t want to be working at age 70 unless it’s by choice.

Your overall asset allocation

Your asset allocation should be appropriate to your risk tolerance, time frame and investment objective. Consider the level of risk you are taking with your investments. As you get closer to retirement and the need to liquidate assets to provide for retirement income, you may want to move all or a portion of those assets into lower risk categories.

The closer you are to needing the cash, the less tolerance you may have for fluctuations in the value of the asset. If you are relying on the cash from a high-risk asset with a value that fluctuates drastically over short periods of time, for example, you may be forced to liquidate it at a time when the value is down substantially.

Because of varying degrees of gains and/or losses in each asset class, your asset allocation is destined to change over time. Rebalance your account periodically to ensure you maintain the asset allocation you’ve chosen to reach your planning objectives.

“Tax-smart” distributions and rollovers

Once you’ve accumulated a comfortable nest egg, how do you get access to what you’ve saved without giving a big chunk of it to the government in taxes? Make sure you know all the tax implications of distributions from different types of assets especially if you have not yet reached age 59½. Certain investments may be better suited for liquidation depending on your particular situation.

Here are several more “good news” provisions that may help you increase the amount you can put away for your retirement:

Traditional and Roth IRAs – contribution limits increase from the current level of $3,000/year and gradually up to $5,000 by 2008. However, depending on your level of adjusted gross income (AGI), you may or may not be eligible to make these contributions or fully deduct these amounts.

401(k)s and similar plans – eligible deferrals increase gradually from a current limit of $12,000 to $15,000 by 2006 with indexing thereafter.

SIMPLE IRA Plans – contribution limits increase gradually from $7,000 to $8,000 in 2003. Further increases to $10,000 for 2005 with indexing thereafter.

“Catch-up” provisions for those over 50 – Generally, these provisions allow anyone over age 50 to make additional contributions to certain retirement programs over the usual limits. Here are some specifics:
IRA and Roth IRA – additional $500 contributions are allowed in 2003-2005; beginning in 2006, additional contributions of $1,000 will be allowed and indexed thereafter in $500 increments
Non-SIMPLE Pension Plans - additional catch-up contributions allowed ranging from $2,000 in 2003 to $5,000 in 2006, indexed thereafter in $500 increments
SIMPLE Pension Plans - catch-ups would be 50 percent of others.

Special provisions for business owners

If you own a business, the law makes it much easier for you to start a retirement plan that can provide meaningful benefits for you and attractive benefits for your employees with less administrative hassles and cost.

Planning tips

The good news of the changes to tax law is good only if you take advantage of these new limits and the key to living the lifestyle you want in your retirement is planning. Whether you have a well-constructed retirement plan or are just beginning to think about retirement, the tax law changes make it even more important to work with a respected and trusted financial adviser who can help you make decisions that are right for you and your unique situation. Every day you wait to implement and fund your retirement plan, you increase your cost to do so.

Nitesh Patel is a financial representative with the Northwestern Mutual Financial Network based in Clearwater for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin). To reach Patel, call (727) 799-3007 or e-mail

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