Guard Against Retirement Plan Pitfalls

The thought of running out of moneyduring retirement is frightening, and itcan be a real possibility for many physician-investors, especially in light of therecent declines in the market. The followingare a few common retirement planningpitfalls that investors should try toavoid when planning for the golden years:

• Long-term care needs—While manypeople don't think they will need long-termcare, a study by the HealthInsurance Association of America showedthat 48.6% of people age 65 and oldermay spend some time in a nursing home,with the average length of stay being 2.7years. The rising cost of nursing homeand home health care could force you todip into your retirement savings. But youcan plan to accommodate these potentialneeds by incorporating long-term careinsurance into your retirement plan.

• Impact of taxes—Many retirees forgetthat much of what they have savedfor retirement is subject to taxation uponwithdrawal. If you rely on tax-deferredvehicles such as 401(k)s or IRAs (ratherthan a Roth IRA that is funded with after-taxcontributions), you may very wellhave to pay taxes when you begin towithdraw the proceeds. However,chances are that after you retire you willbe in a lower tax bracket, because youaren't working and earning the sameincome. Therefore, your withdrawals willbe taxed at a lower rate. But it's always agood idea to keep tax issues in mind asyou approach your retirement years.

• Effects of inflation—Inflation caneat away at your retirement savings' purchasingpower and affect your ability tomaintain your current lifestyle duringretirement. For example, a retirementfund of $1 million earning 7% interestnow would generate $70,000 in annualincome if you retired today. However, ifyou retire in 20 years, and estimate a conservative3.5% rate of inflation, youwould need almost double the income—or $139,285—to maintain the same standardof living. This example is for illustrativepurposes only and does not reflectthe performance of a specific investment.

• Catch-up provision—The EconomicGrowth and Tax Relief Reconciliation Actof 2001 made it possible for individualsage 50 and older to make catch-up contributionsto their employer-sponsoredretirement plans and their IRAs. Takingadvantage of these extra contributions,beginning with an additional $1000 in2001, can be a good way to add additionalfunds to your accounts, as you get closerto retirement. The amount will increaseby $1000 annually, until 2008, when contributionswill be inflation-adjusted—asneeded—in $500 increments.

• Underestimating expenses—Manysoon-to-be retirees assume that they willneed only 80% of their preretirementincome when they retire. While this maybe enough to sustain your current lifestyle,it doesn't always take into account theactivities (eg, travel) and hobbies you arelikely to pursue after you quit working.Don't forget to set aside additional fundsto cover these "leisurely" pursuits.

• Overmanaging portfolio—While it isimportant to keep track of your investmentsand make changes when needed, itis just as important that you do not adjustyour holdings excessively. You should talkwith your financial consultant about yourportfolio regularly and make changeswhen you experience a significant event,such as the birth of a child or a marriage.

• Taking too much risk—While it isalways important to maintain a diversifiedportfolio, there are times when itmay be better to reduce your exposure torisk. Keep in mind you will have less timeto recover any losses resulting from a"riskier" investment as you near retirement.Add to your fixed-income holdingsas your retirement age approaches.

These are just a few of the commonmistakes investors make when planningfor their retirement. Check with yourfinancial consultant about strategies youcan use to avoid these pitfalls and enjoya comfortable retirement.

Joseph F. Lagowski is vice president,

investments, and a financial

consultant with A.G.

Edwards in Hillsborough, NJ.

He welcomes questions or

comments at 800-288-0901 or

www.agedwards.com/fc/joseph.lagowski. This

article was provided by A.G. Edwards & Sons,

Inc, member SIPC.