The ABCs of Retirement Planning

The general rule of thumb hasbeen to save 10% of yourincome for retirement. But it'snot enough simply to tuck away your10%. All savings methods were not createdequal, and investing wisely is thekey to retiring comfortably.

First, the smartest thing you can do isto invest as much as you can of yourpretax income before Uncle Sam andthe state get their share. For example, ifyou pay 28% of every dollar you earnto federal taxes and another 9% forstate taxes, 37% of your earnings aregone before you have touched it.But there is a way to pay yourselffirst—tax-deferred retirement plans.

The three workhorses of tax-deferredretirement plans are:

•The 401(k) is a company-sponsoredplan where the employee elects todefer a portion of their salary (up to$15,500 a year in 2007). The employeroften matches the contribution (up to aset amount); it's free money, but only ifyou contribute.

•The SEP (simplified employee pension)IRA is a traditional IRA that mayaccept an expanded rate of contribution(as high as $45,000 in 2007). It isowned by the employee, who might beself-employed.

•A traditional IRA is a personalretirement savings program towardwhich eligible individuals may contributeboth deductible and nondeductiblepayments. The traditional IRAallows you to make contributions up to$4000 each year ($8000 for a couple) in2007 with the benefit of tax-deferredbuild-up of income. The Roth IRA, onthe other hand, is an after-tax retirementsavings program whereby qualified distributionsare received income-tax-free.

Whichever plan you use, though,make certain that you allocate your dollarswisely. The biggest mistake peoplemake is placing money into theiraccounts, but failing to move it into theright mix of stocks and bonds. Bydefault, undesignated monies go directlyinto a money market account.

How you allocate your funds whenyou are age 30 should differ from whenyou are age 50. A financial advisor canhelp you in selecting a proper mix ofstocks and bonds.

Katherine B. Paal, MBA, CFP ^®, CTFA, is aCertified Financial Planner^™practitioner atHeritage Financial Consultants in Lutherville,Maryland, and is an investment advisor representative,registered representative, andlicensed insurance broker with Lincoln Financial Advisors, aregistered investment advisor and broker/dealer. She welcomesquestions or comments at kpaal@LNC.com. Thisinformation should not be construed as legal or tax advice.You may want to consult a tax advisor regarding this materialas it relates to your personal circumstances.