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AARP Retirement Action Booklet ‘How to Plan an Enjoyable Retirement on Less Money’

AARP is pleased to provide, as a member benefit, information on things you can do now to live a comfortable retirement on less money. This includes managing retirement income wisely, cutting costs, and making your dollar go further. We encourage you to take the next steps in taking control of your finances. Below are some things you can do

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nowU

. Read them over and make a commitment today to do at least five. Write down your results and track your progress. AARP hopes you succeed!!

Action Item Resource Page Your Result Estimate the retirement you will have

Your Road to Retirement

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Determine when you should retire

Timing Your Retirement 6

Learn about retirement income

Managing Your Money in Retirement

8

Understand Social Security

Social Security 11

Know your pension benefits

Pensions 14

Explore annuities

Annuities 16

Manage your 401(k)s

401(k) Plans 19

Manage your IRAs

IRAs 22

Manage House/Mortgages

Mortgages 25

Cut costs

Cost Cutting Tips 28

Get help if you need it

Working with a Financial Professional

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Your Road to RetirementDo you know what your retirement looks like? When you want to buy a house or a car or even a special vacation, you probably can actually “see” the goal you have in mind, and that helps you plan and save enough to achieve the goal. The same should be true for your retirement. If you can’t visualize where you’re heading, it’s hard to plan and save enough money to make sure that you get there.

Retirement is the most important financial goal you’ll ever have. If you can’t afford a car, there’s always the bus. If you can’t put enough money together to buy a house, you can always rent. And while it may be disappointing, you don’t have to take that trip you wanted. But what if you can’t afford retirement? The consequences are a lot more serious.

Planning for retirement now is more complicated than it used to be. Most of us can’t count on a pen-sion from our employer, and many of us are thinking about continuing to work, at least part-time, after retiring from our main job. That makes saving for retirement a lot different than saving for a thing. In fact, it’s not enough to just save money, you need to plot your road to retirement.

First, create your own retirement road map, so you know where you want to go and how to get there. Second, calculate the cost of your retirement lifestyle so you can make sure you have enough money to pay for it. AARP has developed two tools to help you accomplish both steps—the Retirement Roadmap and the Retirement Calculator.

The AARP Retirement RoadmapStart by using the AARP Retirement Roadmap at www.aarp.org/money to figure out what you want in retirement (search for “retirement roadmap”). The results can help you think about the options avail-able to you, and set your retirement priorities.

The Roadmap asks you 12 questions about your

desired lifestyle, personal priorities and general financial status. It reflects the many ideas people have about their retirement and may help you come up with some of your own. Some people dream of leaving work behind to spend more time pursuing a hobby, volunteering in the community, or travel-ing. Others dream of starting their own business or embarking on a new career. Some people are in excellent health and don’t expect to spend much retirement income on medical care. Others realize that they will have ongoing medical expenses, and may need to budget for insurance to help with the bills.

Answering the questions about these types of issues will help you start to “see” your retirement, and the results will give you a sense of what it might take to get you there.

The AARP Retirement Planning CalculatorOnce you have a better idea of the retirement lifestyle you want, you’ll need to figure out how much it will cost. You can estimate how much you need to save by using the AARP Retirement Planning Calculator at www.aarp.org/money. The calculator contains three sections: an estimate of your retirement income needs, an estimate of the sources of money to fund your retirement, and your prospects and alternatives for meeting your income needs.

Retirement Income NeedsTo come up with an estimate of your income needs, here are some things you need to do:

• Estimatehowlongyourretirementwilllast.

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Your To-Do List: Getasenseofwhatkindofretirementlife-

styleyou’llwant by using AARP’s Retirement Roadmap at www.aarp.org/money.

UseAARP’sRetirementCalculator at www.aarp.org/money to determine where you are on your path to retirement security.

Reviewmorein-depthinformationonretire-ment planning. One such booklet – Taking the Mystery Out of Retirement Planning – is avail-able through the Department of Labor. Visit www.dol.gov/ebsa/publications/nearretire-ment.html.

FindouthowmuchyourSocialSecuritybenefit is expected to be (1-800-772-1213 or www.ssa.gov). Also keep track by reading the Social Security statement you receive every year near your birthday.

Ifyouhaveapension,askyouremployerforabenefitsestimate.

Ifyouthinkyoucouldusethehelpofafinancialcounselor, find out who can help you at www.aarp.org/finance.

Discusswithyourspouseorlifepartner the type of retirement you want and how you can fund it.

There’s no sure way to predict how long you’ll live. But you can make a good guess based on average life expectancy rates, your current health status, and how long your parents or grandpar-ents lived. With this guess, go out on a limb. If you think you’ll live to 85 after taking these things into account, plan for enough money to support you at least to age 90. Don’t underestimate how long you think you will live—otherwise, you may not save enough to make your money last.

• Setafinancialgoal.Do you expect your retire-ment to cost you more, less, or about the same as life before retirement? Some expenses may go down a lot. You may have paid off your mortgage, commuting costs will go away if you stop work-ing, you’ll stop contributing to retirement sav-ings, and you’ll probably pay lower income taxes. Other expenses, for health care (Medicare by no means covers it all), traveling, or pursuing other interests, will probably go up.

The calculator asks you to set a goal as a percentage of your pre-retirement income. If you click on the “estimate” button for retirement income, you can come up with a figure by listing your expected retire-ment expenses for items such as housing, insurance and taxes. Most people need somewhere between 70% and 100% of their pre-retirement income to cover expenses when they stop working. So if you earn $30,000 and you think you’ll need 80% of that in retirement, your financial goal will be to have enough

income to pay you $24,000 a year for each year in retirement. (Check to make sure calculator includes inflation.)

Retirement FundingThis section of the calculator can help you identify all of your savings and other sources of retire-ment income, including retirement accounts such as a 401(k) or IRA, Social Security, real estate and investments. To figure out how much money you might actually have on your chosen retirement date, the calculator starts with your current savings and investments, then makes estimates based on your plans for future savings and investment returns.

Calculate ResultsThe last section of the calculator shows how close you can come to your retirement income goal, based on the choices and assumptions you made earlier about retirement spending needs, resources and investment returns. The easy-to-read colored charts as well as numbers make it very clear whether your current roadmap will lead you to your retirement goal.

If your chart shows you falling short of your goal, you can change some assumptions—such as the age you plan to retire or the amount you’ll save every month—to figure out how to create the path you need to take to arrive at your goal.

This and other tip sheets provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.

Special thanks to The Actuarial Foundation for their expertise on this project.

© AARP 2009. 3

Retirement Roadmap Self-Assessment ToolDo you have a retirement dream? Have you thought about it? You may want to travel the world, indulge your green thumb, or spend more time with your grandchildren.Whatever your retirement dream is, it will cost you money. Take this self-assessment to find out what your retirement dreams might mean in dollars and cents.

For each category, please circle the statement that best reflects how you envision your retirement. After you are done, add up your scores using the scoring instructions below.

1. Workinga. I’ve had it—to me retirement means retirement,

and I don’t plan on working.

b. I’m going back to school so I can pursue my dream job.

c. I’ll do some part-time or consulting work—it’ll bring in some extra money and keep my mind active.

d. I will continue working full-time in my chosen profession.

2. Volunteeringa. My dream is to volunteer overseas, even if it costs

me money to participate.

b. I don’t have time to volunteer, but I will give generously to charities.

c. I want to give something back to my community by volunteering.

d. I don’t intend to volunteer.

3. Hobbiesa. I’ll splurge on my hobby, even if it costs me a

pretty penny.

b. I may turn my hobby into a business, although I don’t expect to make much of a profit.

c. I am eager to spend more time on my hobbies, which cost next to nothing.

d. I don’t have any hobbies.

4. Lifelong Learninga. I intend to go back to college for my own

enjoyment.

b. I dream of taking educational trips to learn more about the world.

c. I’ll take a class or go to a lecture.

d. I want to read lots of books from the library.

5. Entertainmenta. With all this free time, I’m going to kick up my

heels and go out on the town.

b. I’ll do an evening out occasionally.

c. I’ll use my senior discount to grab a bargain lunch or see a movie once in awhile.

d. I like to tinker around the house and visit with neighbors.

6. Healtha. My medical bills will stack up because of chronic

health conditions.

b. I expect to pay for expensive prescription drugs.

c. Knock on wood, I’m in good health, but I worry about paying for long-term care.

d. I will be on Medicare and will buy long-term care insurance just in case I need it.

7. Family a. There won’t be retirement for me anytime soon—

that is, from my children or grandchildren— I’m still raising them.

b. I like to spend lavishly on my family—it makes me happy.

c. I’ll fly to see my family occasionally.

d. My family lives nearby and I’ll see them often.

8. Housing a. My rent will continue going up each year.

b. I’m thinking of getting a vacation home.

c. I’ll still be paying off my home mortgage.

d. I own my home free and clear; I will stay here, or sell and buy a less expensive home.

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9. Exercisea. Exercise—that’s the last thing I want to do in

retirement, even if it may mean higher medical costs later on.

b. I want to join in all of the latest, pricey exercise crazes.

c. I intend to join a health club to keep active.

d. I love to walk and plan to do it anytime I want.

10. Travela. I want to travel around the world first-class.

b. I dream of touring the country.

c. I plan to take one big trip each year.

d. I don’t have the travel bug and I don’t want to get it.

11. Moneya. Saving, what’s that? I live for today.

b. Savings, sure I have some—but I’ll struggle after retiring.

c. With a nice amount of savings, I will make ends meet.

d. I feel fortunate—with a pension and investments, I will live well and plan to leave something for the kids.

12. Insurancea. I will need lots of insurance—auto, home, and life

insurance, to be sure.

b. With my children grown up, I’ll drop life insurance.

c. I’ll sell one of the cars so I won’t have to pay the insurance.

d. With one car and a smaller house, my insurance costs will go down.

601 E Street, NW | Washington, DC 20049 | www.aarp.org D18662(608)

Scoring: For each question, please award yourself one (1) point if you answered “a,” two (2) points if you answered “b,” three (3) points if you answered “c,” and four (4) points if you answered “d.” Then, add all the points up.

37 to 48 points –You’re envisioning a modest lifestyle. Your vision of retirement is unlikely to break the bank— you have a good chance of making ends meet in retirement.

25 to 36 Points – Your retirement vision is rather standard, but parts of your retirement could be costly. So, think about changing some of your saving and spending habits now—with your future in mind!

24 or Fewer Points – Watch out! Your vision of retirement may be quite expensive! Better to start saving now rather than later.

Now, take advantage of AARP’s Retirement Calculator to see if you are saving enough money for your retire-ment dream. You can find it under “Tools” at www.aarp.org/money. You can investigate all of the retirement topics listed above at www.aarp.org.

© AARP 2009.

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Timing Your RetirementIt used to be pretty easy to predict when you’d reach retirement. Most people started on Social Security as soon as age 62, and many others knew their journey would end the day they were eligible for their pension.

But if you use AARP’s retirement planning calculator at www.aarp.org/finance you’ll see that figuring out the best retirement date for you is not so obvious. Many people don’t have a pension to count on at a certain age. Employer-sponsored health benefits for employees are disappearing. Social Security alone won’t cover all the bills for a comfortable retirement, so many people have to work well into their 60s, and even later. Others prefer to work, if only part-time, because they’re in good health and they enjoy the social contact and stimulation of a job.

As you create your retirement roadmap and identify the stops along the way, there are two main sets of things to consider in setting a retirement date: your financial prospects and personal or lifestyle issues. Try to think through these issues before you set a retirement date.

Financial ProspectsYou need to figure out how much income—from all sources— will be available to you at the age you want to retire. Let’s say you’d really like to stop working completely at age 62. What financial information do you need to determine if this will work?

Social Security: Once you turn age 62, you can start on Social Security at that time but the longer you wait—until age 70— the higher your benefit will be. The Social Security Statement you receive once a year tells you about how much you can count on if you retire at different ages. However, if you start on Social Security and continue to work, you could lose some of your benefit if you earn income over limits set by the government.

Pension income: If you have a pension, check with your employer to see how much you will receive at different retirement ages. Often a few more years on the job can make a big difference in the amount of your benefit.

Savings: When you retire, you’ll need to draw from the savings in your retirement accounts, such as a 401(k), IRA, SEP, Keogh or SIMPLE plan. The trick is to figure out how much income you can get from investments in these accounts, and how long the money will last if you take some of it out on a regular basis. Retirement accounts have important, special rules:

Social Security and Timing Your Retirement—The Basics• Retirement ages: The exact age you need to reach

before you are eligible for full retirement benefits depends on when you were born. Those born before 1938 have full retirement at 65. Those born after 1959 have full retire-ment at 67. If you were born between 1938 and 1959, your full retirement age will be between 65 and 67.

• Reduced benefits: You can start getting a reduced Social Security benefit as early as age 62. The amount of reduction depends on your age and when you start receiving Social Security. For example, if you were born in 1954, your full retirement age is 66. If you start receiving benefits at 62, you’ll receive 75% of your full benefit. If your full benefit would have been $1,000, you will only receive $750 each month.

• Benefit credits: Delaying to receive your benefits until after full retirement age may result in a larger monthly payment. The increase gets larger until you reach age 70. Note: You do not have to make a required withdrawal in 2009.

• Working: If you collect Social Security and earn an income from a job, you could lose some of your benefit due to the “earnings limits.” If you’re younger than your full retirement age and you earn more than your earnings limit, your Social Security benefit will be reduced.

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Your To-Do List: Use AARP’s Retirement Planning Calculator at

www.aarp.org/money to estimate how much income you’ll need in retirement, and if you are on track to reach this goal.

If you’re eligible for a traditional pension, find out from your employer how much your benefit will be at different retirement ages.

Review your Social Security Statement to see the benefit you can expect at different retirement ages. You can request a statement at 1-800-772-1213 or www.ssa.gov/estimator/.

Find out how your Social Security benefit will be reduced if you continue working while you receive benefits, at www.ssa.gov.

Drive through AARP’s Retirement Roadmap to help define your retirement lifestyle at www.aarp.org/money.

Learn about your options for health insurance if you retire before you qualify for Medicare, www.aarp.org/health/insurance.

Learn about COBRA coverage if you need insurance between jobs before you are eligible for Medicare at www.aarp.org/health/ insurance.

• In most cases, taking money out before you turn 591/2 will be expensive: You’ll owe Uncle Sam both income tax and a 10 percent penalty;

• Once you turn 701/2, to avoid penalties, you must start withdrawing some of the money every year. The amount, set by the IRS, depends on your estimated life span; and

• If you have a Roth IRA, you won’t have to pay income tax on your withdrawals. But to avoid a penalty, you must have had the Roth account for at least five years.

Other income: Be sure to include rental income, money from selling a business or other property, an inheritance or any other financial assets when add-ing up potential income so you can set a retirement date.

Taxes: The IRS may tax your income from Social Security and/or money from retirement accounts. If your total income on your federal tax return is $25,000 or more ($32,000 if you file jointly) you will pay taxes on your Social Security. Before setting a retirement date, make sure you know what taxes you’ll have to pay after you retire, so you’re not surprised later on. If you’re not sure how to do this, get help from a financial professional or another trusted person.

Health Insurance: Finding affordable health insurance is a major challenge for people who retire before going on Medicare at age 65. If you’re thinking of retiring before you turn 65, be sure to check into your options. These may include COBRA from your job, joining an HMO or buying an individual policy— and be sure to factor the cost of health insurance into your retirement budget.

Lifestyle IssuesRetirement usually brings huge lifestyle changes —changes in schedule, routine, where you live, and with whom you spend your time. To make retire-ment the happy and rewarding time it should be, you should start thinking about your options BEFORE you set a retirement date.

A good way to start is for you and your spouse or partner, if you have one, to answer the questions on AARP’s online Retirement Roadmap at www.aarp.org/finance and discuss the possibilities. Once you’ve envisioned what your retirement might be like, you’ll be ready to see how you can manage your money—and when to retire—so you can actually live your retirement vision.

601 E Street, NW | Washington, DC 20049 | www.aarp.org D18672 (309)



© AARP 2009.

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Managing Your Money In Retirement

When you retire, your paychecks stop, but your living expenses continue.In most cases, necessary expenses such as food, shelter, utilities and healthcare are likely to be almost the same as when you were working.That’s why the path you plot to retirement shouldinclude specific plans for managing your money sothat it lasts as long as you’ll need it.

A good way to start is by doing a trial run of yourfinancial plans for retirement through AARP’s onlineRetirement Planning Calculator, atwww.aarp.org/money/financial_planning/. To complete the calculation, you’ll need to collect someinformation, such as how much you expect to receivefrom Social Security or a pension. This exercise willgive you three useful types of information:

• An estimate of the amount of retirement incomeyou’ll need;

• The sources of money, such as Social Security anda 401(k), you’ll have to fund your retirement; and

• Alternatives for meeting your income needs.

Financial Risks in RetirementThroughout life, everyone faces personal risks thatcan have an impact on their finances, such as jobloss, an accident or illness, a business failure or badinvestment decisions. In retirement, when yourincome is usually lower and your prospects for earn-ing are smaller or do not exist, you need to be espe-cially aware of other risks such as:

• Inflation, which can lower the spending value ofthe savings you are using to pay expenses;

• Investment ups and downs, especially in thestock market;

• Rising, often unexpected, medical and caregivingexpenses; and

• Living longer than you expected to and planned for.

Money Management OptionsAfter using the AARP calculator, you’ll have a prettyaccurate idea of how much money you’ll need for acomfortable retirement, and how much money youcan count on to finance those “golden years.”

Most retirees have two types of income. One type is areliable, usually monthly, source such as SocialSecurity, a pension or an annuity. The other is retire-ment savings, which may be in the form of bank sav-ings accounts or investments. The investments maybe in a retirement account such as a 401(k) or IRA, ina regular brokerage account, or in real estate. Or theymay simply be mutual funds or stocks and bondsthat you’ve bought directly.

Your first challenge is to maximize the regularincome streams by making informed decisions about when to start withdrawing Social Security or a pension. (See AARP’s Tip Sheets on Social Securityand pensions for details.)

The next challenge is to figure out what to do withyour cash and investments to protect yourself againstinflation risk and running out of money too soon.

An ExampleTo understand the challenge, consider this hypotheti-cal example: Ann and Sam Jones are both retired.They are 65 years old and assume they’ll live until 90.The Jones’ need $40,000 a year to pay their basicexpenses. Their Social Security checks add up to$20,000, and Sam’s pension adds another $10,000.That leaves them with $30,000—$10,000 a year short.

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Their only other possible source of income is$100,000 in their IRA. What could they do with theIRA money to get them closer to the $40,000 a yearthey need? Here are their choices:

• Withdraw a certain amount of money out of the IRA every month, hoping it won’t run out too soon;

• Cash out the IRA to buy an immediate annuity—a contract with an insurance company, whichguarantees a minimum income for the rest ofyour life; or

• Do some of each: Use some money to buy anannuity, and keep the rest to invest (hopefully tokeep up with inflation) and withdraw as needed.

Factors to ConsiderThere is no one, simple solution to the Jones’ problem. If you face a similar situation, you need to consider several factors, and do some financial calculations. Here are some of the most importantthings to consider:

• Your age and life expectancy: Your age, yourhealth status and family medical history can helpyou estimate how many years you may need yourmoney to last.

• Types of assets: If you have money in a 401(k),IRA or similar retirement account, Uncle Samrequires you to start withdrawing it—at a certainrate based on your life expectancy—by April ofthe year after you turn 70 1/2. If you don’t makethe withdrawals IRS requires, you must pay apenalty of 50 percent of the unpaid amount.There is no similar rule for a traditional pension.

• Tax situation: Check on the taxes you’ll have topay for receiving income from different sources.You do not have to pay income tax on moneywithdrawn from your Roth IRA (if you’ve had theaccount for at least five years and are 59 1/2 orolder), but you must pay tax on income from a401(k) or a traditional IRA. The profit you receivefrom selling stocks, real estate or other invest-ments will also be taxed, but at the capital gainsrate, which may be less than your income tax rate.

• Your investing and money management expertise: Some people feel more secure andbelieve they can make more profits making theirown investment decisions or working with afinancial advisor. Others feel more secure by put-ting the money into a fixed annuity, which theydo not have to invest, and which guaranteesthem a certain amount of money for the rest oftheir life.

Making a PlanNow let’s go back to the three types of options, tofigure out what’s best for you.

• Set up a withdrawal plan. Many investment advisors recommend withdrawing 4 percent ofthe value of your total cash and investments peryear. But you should calculate to see how muchincome this will provide you, and how long yourmoney will last at that or another rate. You’ll also have to decide whether to make your owninvestment decisions, or to work with a financialprofessional. In any case, your goal should be toincrease the value or receive enough incomefrom your investments to, at least, keep up with inflation.

• Buy an immediate annuity: Take money out ofyour account(s) and purchase an annuity thatpays a certain amount for the rest of your life.There are many different kinds of annuities,including a variable annuity that does not guarantee a certain amount of income. Othertypes may not provide a cost-of-living increase. If you are tempted to buy an annuity, make surethe insurance company is financially sound andread AARP’s Tip Sheet on annuities to learn moreabout the pros and cons.

• Do some of each: Use some money to buy anannuity and keep the rest to invest (hopefully to keep up with inflation) and withdraw as you need it.

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© AARP 2007.

Your To-Do List: Learn more about money management

options by reading “Don’t Run With YourRetirement Money” on the ActuarialFoundation’s website, www.actuarialfoundation.org/consumer/dont-run.htm.

Estimate how long your retirement savingswill last at different withdrawal rates using the calculator at www.money-zine.com/Calculators/Retirement-Calculators/Retirement-Withdrawal-Calculator/.

Get tips on managing your money from theAARP website, www.aarp.org/finance.

Find out about required withdrawals fromretirement accounts by reading IRSPublication, 590: Individual RetirementArrangements, at www.irs.gov/publications/p590/index.html.

If you need help creating a retirement moneymanagement plan, read AARP’s Tip Sheet“Working with a Financial Professional.”

To estimate how many years you might live, use the longevity calculator at www.livingto100.com.

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Social SecurityHow would you like to have a pension plan that provides lifetime income with an annual cost-of-living increase? If you will have worked at least 10 years before you retire, you have one: Social Security.

Social Security is the base of retirement security for 96 percent of American workers, and the larg-est source of income for older Americans. As long as you work, you’ll continue to earn credit toward your retirement benefit. And once you decide to retire, any time after you turn 62, you’ll be able to collect Social Security for the rest of your life.

However, the average earner’s retirement benefit is about 40 percent of their past earnings. So per-sonal savings and pensions must make up the rest of the amount you’ll need to have the lifestyle you’ve planned for on your retirement roadmap.

How It WorksMost of us pay into Social Security through contribu-tions (FICA) that come out of our paychecks (payroll deductions). In return, you may qualify not only for a monthly retirement benefit but also for dis-ability benefits, survivor benefits, and support for families in which a parent is survived by children under the age of 16. Each type of benefit has differ-ent eligibility rules. For details, see the Social Security Administration website, www.ssa.gov.

Retirement Benefit To qualify for a retirement benefit, you must work for at least 10 years. The amount you receive is based on how much you’ve earned throughout your life. The retirement benefit is designed to replace more of the earnings of lower-income workers, who have less opportunity to earn a pension or save for retirement than people who earn more.

You can start collecting Social Security at age 62. But you can only receive the full retirement benefit when you reach a certain age—between 65 and 67— that

depends on your birth date. To find the exact date when you’ll qualify for full retirement benefits, see this chart on the Social Security website at www.ssa.gov/retirechartred.htm. These are the broad age categories:

Birth year Full retirement age Before 1938 65

1938-1942 65

1943-1959 66

1960 or later 67

Your Social Security Statement: A Planning ToolEvery year, the federal government sends “Your Social Security Statement” to everyone age 25 or older. The Statement is a good tool to help you plot your path to retirement. Here’s how you can use the Statement to help with your retirement planning: • Read the “Estimated Benefits” section to find an estimate

of your Social Security benefit based on retiring at three different ages—62, your “full” retirement age, or 70.

• Make sure your name, birthdate (on page 2) and the last four digits of your Social Security number are correct.

• Study your annual Earnings Record, on page 3. If you think there’s a mistake, check your salary stubs or other records. If you don’t have the documentation, try to get it from your previous employer. If Social Security doesn’t have a record of all of your earnings, you could end up with a lower benefit or even no benefit at all.

• Ask questions or correct mistakes by calling the Social Security Administration at 1-800-772-1213.

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The amount that your benefit is reduced by retiring earlier depends on your age when you start receiv-ing Social Security. For example, if you were born in 1954, your full retirement age is 66. If you start receiving benefits at 62, you’ll receive 75% of your full benefit. If your full benefit would have been $1,000, you will only receive $750 each month.

If you delay your benefits until after full retirement age, you can receive a larger monthly payment. The amount of the increase depends on how long you delay. The increase gets larger until you reach age 70.

When should you start receiving Social Security? How you decide depends on factors such as whether you plan to continue working, the amount of your retirement savings, how many years you expect to be retired, and your family situation. (See the AARP Tip Sheet, “Timing Your Retirement.”)

Here’s an example of the estimated benefit for a worker who earns about $37,000 currently and has worked a full career under Social Security:

Age 62 $786 a month

Age 67 (full retirement age) $1,090 a month

Age 70 $1,518 a month

In general, you should try to wait until full retirement age, or even longer, to start on Social Security. Unless you can rely on a traditional pension or have a lot of personal savings, you may need the higher benefit that comes with waiting a few years.

Spousal BenefitIf you’re married, you may be able to increase your Social Security benefit based on your spouse’s work record. Social Security benefits are not awarded based on sex. A man and a woman with the same earnings over their lifetime will receive the same benefit. However, the program was created at a time when it was common for wives to work in the home, rather than in a job that was covered by Social Security. Even though this is no longer the norm, the benefits are still calculated the same way. Basically, a spouse may receive up to 50 percent of the benefit of the eligible spouse.

These examples show two ways you can qualify for this additional retirement income:

• You never worked in a job with Social Security—or you worked in a covered job less than 10 years, so you’re not eligible for a benefit. Your spouse receives $1,200 per month in Social Security. Based on your spouse’s work record, you can receive half of that, which is $600. So you and your spouse will receive a total of $1,800 per month from Social Security.

• You worked enough to qualify for $300 a month from Social Security. Your spouse gets $1,200 per month. Half of that is $600, so you’re eligible to receive $600, instead of the $300 based on only your record. So instead of $1,500 a month, the two of you will receive $1,800.

Even if you’re divorced, you may be able to collect Social Security based on your ex’s work history. To qualify in this case, you must:

• Have been married for at least 10 years; and

• Remain unmarried until after age 60.

This does not affect your ex’s benefit, and Social Security does not tell your ex that you’re getting the benefit.

Survivor BenefitIf a parent dies and is survived by children under age 16, the surviving parent may apply for benefits. If there are no children under age 16, the surviv-ing spouse can begin to collect the benefit at full retirement age, or take a reduced benefit beginning at age 60. A surviving spouse who is disabled can begin receiving benefits at age 50.

Social Security and WorkSocial Security allows you to work and collect your benefit at the same time, but there can be a penalty for doing this. If you earn more than certain limits, you can lose some of your Social Security. Here are the basic rules:

• If you’re younger than your full retirement age and working, Social Security will deduct $1 from your benefit for every $2 you earn above an annual limit. (The 2009 limit is $14,160.)

• In the year before you reach full retirement age, Social Security deducts $1 in benefits for every $3 you earn above a different limit. (The 2009 limit is $37,680.) But this only applies to earnings before the month you reach your full retirement age.

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Once you reach your full retirement age, you are not subject to the earnings limit. More important, your benefit is automatically recalculated using a later retirement age that gives you credit for any months in which you lost benefits because of working. This means that any benefit reduction because of work-ing will be made up after full retirement age by an increase in your future benefit.

The System’s OutlookAs Americans live longer and the first wave of baby boomers approaches retirement, there will be more

retirees receiving benefits, and fewer workers to pay into the system. But even if no changes are made, Social Security will pay full benefits until the 2040s. After that, if no changes are made, Social Security will still be able to pay over 70 percent of promised benefits. AARP favors a balanced approach to restoring the long-term solvency of the program and encourages policy makers to consider ways to keep Social Security strong for the future.

Your To-Do List: Sign up for benefits at 1-800-772-1213 or www.

ssa.gov.

Use one of Social Security’s calculators to find out how much your benefit is expected to be at www.ssa.gov/planners/calculators.htm.

Look up your full retirement age at www.socialsecurity.gov/retire2/agereduction.htm.

Before deciding to collect your benefit while continuing to work, take the “earnings test” at www.ssa.gov/OACT/COLA/RTeffect.html to find out how your benefit would be affected.

Save! Social Security isn’t a stand-alone retire-ment answer. Make use of retirement savings options available to you, like 401(k)s and IRAs.

Update your information annually on AARP’s Retirement Planning Calculator, www.aarp.org/finance, and include the latest benefit esti-mates from your Social Security Statement.

Stay up to date on Social Security news at www.aarp.org/money/social_security

Order other Money Matters Tip Sheets to share with friends at www.aarp.org/orderfinancial-pubs.



© AARP 2009.

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15

Working with aFinancial Professional

Making a financial plan for your journey to retirementand sticking to it are challenging tasks. AARP’s onlineRetirement Roadmap and Retirement Calculator, atwww.aarp.org/finance, can start you on the path. Butyou may also decide at some point that you needprofessional help to make sure you reach your goals.

There are various reasons you might want to workwith a financial professional:

• To create a detailed, realistic financial plan, with specific dates, goals and strategies;

• To monitor your progress toward meeting your goals;

• To advise you on responding to financial eventsor changes in your life, such as a birth of a child,buying a home, divorce, illness, or receiving aninheritance;

• To develop an investment strategy; or

• Attend to specific financial tasks such as taxpreparation or estate planning.

But before you select one, it’s important to understandthe different types of professionals, their credentials,how they get paid and how much they’ll charge fortheir services. To get this information and find thebest one for you, you should interview at least two or three professionals before making a decision.

Types of Financial ProfessionalsDo you know the difference between a financial planner,investment adviser, a broker, and an estate planningattorney? As you’re looking for assistance with financialtasks, these are only a few of the professionals youmight come across. Here are some basic facts aboutsome of the different types of financial professionals:

• Financial Planners—These professionals general-ly take a broad view of your financial affairs. Theycan function in the role of your personal chiefinvestment officer or advise you periodically onfinancial matters. The most comprehensivefinancial planners assess every aspect of yourfinancial life. In many cases, these planners alsomanage your investment portfolio.

• Investment Advisers—Investment advisers generally focus more on managing your investments,and the majority are compensated on an annualbasis by a percentage of the assets they managefor you.

• Stockbrokers—These professionals traditionallybuy and sell stocks and bonds, and are compensatedby commissions. However, today there are brokerswho also provide financial planning services.

• Insurance Agents—An insurance agent can helpyou with your insurance needs, from propertyand casualty insurance to health, long-term careand life insurance, and annuities.

Some financial professionals use titles that sound officialbut do not require any special certification or training andare not subject to any specific ethics, standards or laws. Ifyou are considering working with someone who has one ormore of these titles, be sure to ask which, if any, formallicenses and/or credentials they have.

• Financial Adviser (or Advisor)• Financial Analyst• Financial Consultant• Financial Planner• Investment Consultant• Wealth Manager

Source: “Understanding Professional Designations,” NASD,which regulates the national securities industry.

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• CPA/Accountants—A CPA is a professional licensedby a state to offer a variety of accounting servicessuch as simple tax preparation, financial audits,business valuations and succession planning forsmall businesses.

• Estate Planning Attorneys—These lawyers candraft your will, durable powers of attorneys, andhealth care proxies, or develop wealth transferstrategies to ensure your estate passes to yourheirs in the most tax-efficient manner.

Finding a Financial ProfessionalThe financial professional you choose will be entrustedwith your personal financial information and couldalso have a major impact on your financial future. Soyou should take the time to find one who will meetyour needs and with whom you can work comfortably.

There are several ways to search and check the back-grounds of financial professionals. You may ask forreferrals from people you know, or contact two orthree financial services companies. Below are somewebsites that can also help.

Once you have the names of some professionals toconsider, request appointments to interview themabout their services. If they do not offer you a

preliminary, free opportunity to meet them, thencross the name off your list. In the interview, ask these key questions and any others you might have:

• What services do you offer? Examples might bedeveloping a financial plan, monitoring the planand meeting with you regularly, or investing yourmoney.

• What licenses do you hold? Are you licensed byan organization or a government agency and ifso, which one(s)?

• What type of clients do you usually work with?Financial professionals may have a particularinterest, specialty or clientele.

• How do you charge for your services? Financialprofessionals can charge for their services in avariety of ways including flat fees, percent ofassets managed, or on a commission basis.

After the interviews, compare the answers youreceived. Think about each professional’s approachto their clients. Did he or she discuss financial issuesin common words that you could understand? Doyou think that person understands your situationwell enough to be entrusted with your personal information and your future?

Professional Website

CPA/Accountant www.nasba.org www.aicpa.org www.cpadirectory.com

Financial Planner www.fpanet.org www.cfp.net/search www.napfa.org

Stockbroker www.nasd.org www.nasaa.org www.adviserinfo.sec.gov

Insurance Agent www.naic.org www.iiaba.org

Estate Planning www.abanet.org Attorney www.naela.org

www.actec.org

Investment www.nasaa.org Advisers www.adviserinfo.sec.gov

What do all the letters mean?The surprising truth is that anyone can call himself or her-self a financial adviser without meeting any educationaland experience requirements. One thing to check in yoursearch for professional financial help might be to learnwhat those letters mean after a candidate's name to see ifthey really are licensed or have earned professional desig-nations. Here are some common designations:

CFP Certified Financial PlannerCPA/PFS Certified Public

Accountant/Personal Financial Specialist

CFA Chartered Financial AnalystChFC Chartered Financial

ConsultantCLU Chartered Life UnderwritersCFG Certified Financial GerontologistAEP Accredited Estate Planner

While these credentials set the advisers who earned themapart, you should never judge a financial professional by adesignation alone. Learn more about what these designations mean at www.aarp.org/finance.

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Your To-Do List Think about what you want from a financial

professional and look for someone with thatexpertise. For a list of questions to ask whenyou interview a person you may want to workwith, see “What Questions Should You Ask,” on AARP’s website, www.aarp.org/money/financial_planning/sessioneight/what_questions_should_you_ask.html.

Learn about what brokers (also known asinvestment advisers) do and how they are regulated by the Securities and ExchangeCommission. Go to the SEC’s website,www.sec.gov/investor/brokers.htm.

Get a list of questions you should ask a financialprofessional at www.aarp.org/finance.

For details on the credentials of dozens of different types of financial professionals, go towww.nasd.com/investorinformation.

This and other tip sheets provide general financial information; it is not meant to substitute for, or tosupersede, professional or legal advice.© AARP 2007.

Fees and CommissionsFinancial professionals charge for their services in numerous ways. Before you hire any financial professional, make sure you understand how thatperson gets paid, and, make sure that it matches how you want to pay. Below are some of the waysmany financial professionals are paid:

• A percentage of the value of the assets they manage for you.

• An hourly fee for the time they spend working for you.

• A fixed or retainer fee.

• A commission on the products they sell.

• Salary.

• Some combination of the above.

Each compensation method has potential benefitsand possible drawbacks, depending on your needs.

Be aware that some people who make money basedon commissions for selling products may not alwayshave your best interests in mind.

Working TogetherWhen you choose a financial professional to workwith, set the terms of your relationship—how oftenyou’ll meet or talk on the phone, exactly what workyou want done, and what the fees will be. No mattertheir title or training, any financial professionalshould be able to guarantee you these things:

• Open communication with the client, includingresponses to your questions about your financialsituation and decisions.

• Confidentiality of your personal information.

• A commitment to work in the best interest of theclient—not just to earn the most fees from you.

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601 E Street, NW | Washington, DC 20049 | www.aarp.org D1883819

Cost Cutting TipsMost of us spend more than we need to for a lot of things. If you really canafford luxuries such as gourmet teas or designer clothing and still save foryour future, you’re lucky. However, if you’re struggling to meet the financialgoals you’ve set on your retirement roadmap, it’s time to look for ways to cut expenses—daily, monthly, and long-term.

Start by seeing if you’d benefit from either of thesebig cost-cutting strategies:

• If you’re paying high interest on a mortgage andyou plan to stay in your home for a few years,consider refinancing. Be sure to do your home-work to avoid closing costs that might make themove less attractive financially.

• Reduce your credit card debt. Call the bank andtry to negotiate lower finance charges. Then paydown the debt as fast as you can, starting with thehigh-interest debt. (See AARP’s Tip Sheet,“Managing Debt.”)

It’s easy to spend money without realizing how muchit adds up to over a week, a month or a year. So, tomake other cuts in your expenses, try reviewing whathabits, like eating lunch in a restaurant every day orbuying expensive clothes, can add up to in the courseof a year. Here are some places to look for cuts.

Meals and EntertainmentAmericans love to eat out, whether it’s a daily break-fast at a pricey coffee shop or fast-food dinners whenyou feel too tired to cook. Keep track of where you’reeating your meals and what they cost. Bringing yourlunch to work and cooking your meals for dinner aregood ways to reduce food expenses on a regularbasis. Movie fans can save money by renting DVDs,instead of paying admission to the theater and eatingthat expensive popcorn.

Household and TransportationExpensesCable television, phone service—including your cellphone— and Internet service can add up to a tidy

sum every month. Make sure you have the mosteconomical plans available. If you’re in an area withmore than one provider, comparison-shop.

Energy costs are climbing and will probably continueto do so. Do an energy review of your home. Plug updrafty windows and doors with weather-stripping,insulate them with blinds or curtains, and then turndown the winter temperature inside by a couple ofdegrees. Consider solar heating and cooling if it’sfeasible where you live. If you have central air, try touse it less. Install ceiling fans in some rooms, so youdon’t have to cool the entire house. During thesummer months, avoid using the clothes dryer, dishwasher, etc. during peak hours to lower yourenergy bill.

Your biggest transportation expenses probably comefrom one or more vehicles. Here are some ways to cutback on those costs:

• Car-pool to work with neighbors or colleagues.

• Use public transportation.

• Talk to your insurance company about ways youcan lower your rate.

• On the highway, save money on gas by driving 55 miles per hour instead of faster.

ShoppingThoughtful planning, before you shop, is a good wayto reduce expensive impulse buying. Whether you’regoing to the grocery store, shopping for holiday gifts,or looking for a new pair of shoes or a party outfit,make a list and decide what you can afford to spendahead of time—and don’t buy something unless youreally need it.

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Your To-Do List: Analyze your personal spending.

Make a budget and stick to it. Use forms atwww.aarp.org/finance to create a budget andtrack your cash flow.

If you’re comfortable with doing financialtasks on the computer, consider purchasingbudgeting software to help keep track of yourexpenses.

Ask your local electric or gas company to helpyou with an energy review of your home.

Find more cost-cutting ideas in “66 Ways toSave Money,” by the Consumer Federation ofAmerica, www.consumerfed.org/pdfs/66ways.pdf.

Comparison-shop in the store and on theInternet, and use coupons.

Before refinancing your mortgage, read theinformation from the Federal Reserve Board in“A Consumer’s Guide to Mortgage Refinancing,”at www.consumer-guides.info/Mortgage_Refinance/.

Make sure you take advantage of all the taxbreaks coming to you, such as the Savers’Credit for putting money into a retirementaccount, or property tax assistance for seniors.If you need help finding these savings, learnhow AARP’s Tax-Aide program may be able tohelp, www.aarp.org/money/taxaide/.

In the supermarket, read the unit prices: is it cheaperto buy a 16-ounce box of crackers for $3.50, or 12ounces for $3.10? For larger expenses such as awinter coat or a washing machine, check prices atmore than one store before you make a decision. You should also check out thrift shops, especially ifyou know of one in an upscale neighborhood whereyou might get some good bargains. For Internetpurchases, in addition to comparison-shopping onprices, check shipping charges. Some sites make youpay the whole cost; others will offer a deal to enticeyou to buy from them.

Health CareAs health care costs spiral, they become a larger partof almost everyone’s budget. To minimize your costs,review what you spent on health care and insurancelast year so you can make sure you choose thecoverage that’s best for you and your family. Whetheryou have a choice among plans offered by youremployer, or buy your own insurance on the openmarket, calculate which deductible will be best foryou. If you and your family are very healthy, a higherdeductible will probably be the most economicalchoice. Also check to see if you can save health carecosts by following these tips:

• See if your health insurance offers a mail-order

system for prescriptions. It might be cheaperthan buying directly from the drugstore.

• Check the anniversary date of your insurancebefore scheduling routine medical appointmentsor tests. For example, your insurance may requireyou to wait a full calendar year betweenmammograms. If you schedule a mammogrameven a day or two before the end of that year, theinsurance may not pay for it.

• If you know you’ll need several appointments ortests that are definitely not urgent, consider wait-ing until you choose your insurance for the nextyear. Then take a lower deductible so that you’llget more of the costs covered.

Luxuries and Unnecessary ExpensesIt’s easy to commit to expenses for goods or servicesthat sound appealing or necessary—and then end upnot getting your money’s worth. If you pay for weeklyhousekeeping, try to cut back to twice a month.Cancel subscriptions to magazines or newspapersthat are piling up without being read, or membershipat the fitness club you never visit.

These and other cost-cutting tips are a few examplesof how you can begin the journey toward meetingyour financial goals for your retirement.


This and other tip sheets provide general financial information; it is not meant to substitute for, or tosupersede, professional or legal advice.Special thanks to The Actuarial Foundation for their expertise on this project.© AARP 2008.

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Mortgages

More than three-fourths of Americans age 65 and older own their own home.However, for many people approaching retirement, a key decision on thepath to financial security will be whether to pay off their current mortgage,to look for a mortgage with better financial terms, to get a new mortgage fortheir current home, or to buy a new home.

A mortgage is a long-term loan issued by a bank oranother lender. Most lenders require you to pay adown payment of 20 percent of the loan. The remain-der 80 percent is what you owe on the loan. Whenyou make a payment, the money goes toward twobasic expenses:

• The principal, which is the dollar amount youhave borrowed; and

• The interest, which you pay at a specific rate, such as 6 percent per year.

Private Mortgage Insurance (PMI), another cost associated with a mortgage loan, is usually required if the down payment is less than 20 percent.

These tax tips may help you answer questions aboutyour mortgage.

In addition to the principal and interest, you canusually also arrange to have real estate taxes andproperty insurance payments rolled into your mort-gage payment, so you don’t have to pay them sepa-rately. The lender holds these payments in an escrowaccount and then pays the bills when they come due.

In the first years of a mortgage, most of your pay-ment is interest. The closer you get to paying it off,more of your payments go toward the principal.

Should You Have a Mortgage?When deciding whether to have a mortgage as youapproach retirement, consider these two key financial issues:

• Will you be able to afford the payments—as wellas utilities, maintenance and insurance on yourhome—after you retire, when your income willprobably go down?

• Will having a mortgage offer you a significant taxdeduction?

Types of MortgagesIf you decide that getting a new mortgage or refi-nancing your current one makes sense for you, learnhow the different types work. Before signing anypapers, be sure you get the following information onthe mortgage in writing before closing:

• Accurate estimates of the closing costs and fees;

• The exact amount you’ll need to pay everymonth; and

Tax Tips

• When you make mortgage payments, you get to deductthe mortgage interest from your income taxes.

• You do not get a deduction for paying the principal, sothe closer you are to paying off the mortgage, thelower the deduction.

• If you stop working and your earnings go down, yourincome tax bill will probably also go down. So if you’restill paying the mortgage, the deduction will save youless money.

• If you are paying a mortgage on the home where youlive, you can deduct state and local real estate taxes onthe property.

• You do not get a tax deduction for paying rent.

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• Whether the payment can go up, and if so, byhow much.

In the past, a typical mortgage required a 20 percentdown payment, lasted for about 30 years and had a“fixed” interest rate that never changed. But in recentyears, many new complicated versions have come on the market. They are often tempting because thepayments start out low. But they can be risky,because over time the payments can go up a lot. Hereare some examples of other types of mortgages:

ARM: With an Adjustable-Rate Mortgage (ARM), youhave a certain number of years to pay off the loan.But the interest rate can change, so you may end uppaying more or less than you expected.

Take the case of a 20-year ARM with an interest rateof 6 percent for five years. After five years, the lenderhas the right to change the rate, using a formula thatis based on financial factors, such as the interest rateon Treasury bills. Usually the rate cannot go up more than 2 percent a year, say from 6 percent to 8 percent. In this example, if you moved out of theproperty in five years, there would be no risk of higher payments. But if you planned to live in theproperty for 20 more years, your payment could goup quite a bit.

Interest-Only Mortgage: Let’s say you take out a 20-year mortgage. For the first five years your payment is very low because it covers only the interest. After five years, you must start paying both interest and principal. So for the next 15 yearsyour payment could increase a lot to make up for notpaying any principal for the first five years. If you arenot certain what your future income will be, this typeof mortgage could be very risky.

Balloon Mortgage: This type of mortgage offers lowerpayments for a certain number of years, for exampleseven years. After that, you must pay the entire bal-ance of the loan in one lump sum. Don’t sign up forthis type of mortgage unless you can count on havinga big chunk of money on hand when it comes due.

Reverse Mortgage: If you are 62 or older, this may bea way to help with expenses. You get a new mortgageand instead of making monthly payments, the bankgives you money as a lump sum, monthly payment orline of credit. The mortgage comes due when youmove out of the home. This is a complicated financialtransaction and can be expensive, so make sure youunderstand all the pros and cons before agreeing to it.

Sub-Prime Mortgage: People with serious creditproblems may be unable to get a mortgage on typical market terms. Sub-prime mortgages carrymuch higher interest rates, penalties and other termsbecause the lender considered you a credit risk.

Mortgage Terms

One of the best ways to make sure you choose the besttype of mortgage for your financial situation is to learn the lingo used in the field.A good source of definitions of mortgage and real estate terms is the Federal Trade Commission’s “Real Estate Glossary,”www.ftc.gov/bc/realestate/resources/realestateglossary.pdf.

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Your To-Do List: Use AARP’s Retirement Planning Calculator

to estimate how much mortgage you canafford on your retirement income atwww.aarp.org/money.

For tips on how to shop for a mortgage andother practical advice, go to the Departmentof Housing and Urban Development website,www.hud.gov/buying/#afford.

Learn all about reverse mortgages atwww.aarp.org/money/revmort/ on AARP’s website.

Order a free copy of AARP’s “BorrowersGuide to Home Loans.” Just call 1-888-OUR-AARP (1-888-687-2277) and ask for D17381.

Your credit score, based on your creditrecords, is a big factor in qualifying for amortgage. To learn how it’s calculated, andhow to improve it, read “Credit Scoring” onthe Federal Trade Commission’s website,www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.htm.

Beware of predatory lending—excessiveinterest rates and fees that may be charged to people with credit problems. Read “Don’tBe a Victim of Loan Fraud” on the HUD web-site, www.hud.gov/offices/hsg/sfh/buying/loanfraud.cfm.


© AARP 2007.

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IRAsWhile you’re on the road to retirement, the best way to save is through a work-based plan, like a 401(k). If you don’t have a plan or if you are look-ing for additional ways to save for retirement, an Individual Retirement Account (IRA) is the place to start.

An IRA is similar to a savings account, but there are two big differences. First, IRAs provide tax advantages to encourage you to save for retirement. Second, in addition to cash, you can put a wide variety of investments—including stocks, bonds and mutual funds—into an IRA so your money has a chance of growing at a better rate.

As long as you meet some limits on your income and on the amount you contribute, you can add to the account every year. However, most years both the income and contribution limits change. So before you make a contribution, check www.irs.gov or with your financial institution for the most current information. In general, you must be earning income from a job to contribute to an IRA. However, a family can also save more money for retirement by opening an IRA for a spouse who does not have earnings from a job, and contributing to it from other income.

How to Set Up an IRA• Openonethroughyourbank,abrokeragehouse,

a credit union, or a life insurance company.

• Beforeyouopenanaccount,comparefees.Choose an account with low fees to maximize your savings.

• Makeaninitialdeposit,whichmaybeanywherefrom $100 to $1,000.

• Contributethroughapayrolldeductionifyoucan, or through a regular transfer from your checking account. You could also choose to make occasional contributions.

• Askwhatinvestmentsareavailablebeforeyouopen an account to make certain you have the options you want.

Investment OptionsThe IRA itself is simply an account. You have to choose how to invest your contributions and earnings.

• BankstypicallyofferIRAinvestmentsin certificates of deposit or money market funds.

• Otherfinancialinstitutionstypicallyofferstockand bond mutual funds and individual stocks and bonds, as well as other investment choices.

Decide how to invest your contributions based on these factors:

• Yourcurrentage;

• Whenyouexpecttoretire;and

• Yourcomfortlevelwithriskrelativetoyour savings goal.

Traditional vs. RothThere are two main types of IRAs—the traditional and the Roth. The main difference between them is that when you contribute to a traditional IRA, you receive an immediate deduction on the same year’s taxes.WithaRoth,youmustpayincometaxonthemoneyyoucontributeeachyear.Butwhenyouretireand start taking money out of a Roth, you won’t have to pay taxes on the withdrawals.

See the chart for some factors to consider when deciding whether to open a traditional or a Roth IRA.

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Rollover IRAsIf you have a 401(k) or other retirement account at work, when you leave your job you must decide what to do with the money in the account. If you simply withdraw the money and plan to spend it, you’ll have to pay income tax on it. If you’re under 59 n, you’ll probably have to pay a penalty for early withdrawal.

To keep the tax benefits and allow the money to continue to grow for your retirement, often the best option is to transfer the 401(k) money directly into an

IRA Rollover account in a bank or other financial institution. This allows you to choose how to invest the money. It also frees you from having to keep up with changes and new information about your account when you are no longer working for that employer. Typically you must move the money into the rollover IRA within 60 days of leaving your job. So don’t put off choosing a financial institution to help you make the switch.

Traditional IRA

• Youmustbegettingpaidforworkingandbeunderage701/2.Spousesofworkersmayalsocontributewithincertainincomelimits.

• IRSallowsyoutocontribute$5,000eachyear($6,000ifyouare50orolder).

• Contributionsaredeductiblefromyourtaxableincome.

• YoumustpayincometaxesonmoneyyouwithdrawfromtheIRA.

• 10%penaltyforearlywithdrawalbeforeage591/2withcertainexceptions.

• 50%penaltyfornottakingminimumrequiredwithdrawalseachyearatage701/2orolder.

• Nopenaltyonearlywithdrawalsforcollegetuition(upto$10,000);first-timehomepurchase;certainmedicalexpenses;disability;orifyouinheritanIRA.

• YoucanrollyourtraditionalIRAintoyournewemployer’s401(k).

• Youcanrollyour401(k)intoatraditionalIRA.

Roth IRA

• You’refullyeligibleatanyageifyoumeetcer-tainincomelimitsthatchangeoften.Spousesofworkersmayalsocontributewithincertainlimits.CheckPublication590atwww.irs.govforcurrentlimits.

• IRSallowsyoutocontributeupto$5,000eachyear($6,000ifyouare50orolder).

• Youmaynottakeataxdeductiononcontributionswhentheyaremade.

• Youpaynofederaltaxonearningsandinter-est,providedwithdrawalsmeetcertainrules.

• 10%penaltyforearlywithdrawaloninvest-mentearningsduringtheRoth’sfirst5yearsorbeforeage591/2withcertainexceptions.

• NopenaltyonwithdrawalsaftertheIRA’sfirst5yearsifyouareover591/2.

• Nopenalty.Minimumwithdrawalsarenotrequired.

• Withdrawalsaretax-freeatanytimeifwith-drawalisforcollegetuition(upto$10,000),first-timehomepurchase,certainmedicalexpenses,disability,orifyouinherittheIRA.

• YoucanrollyourRothIRAintoyournewemployer’s401(k).

• Youcanrollyour401(k)intoaRothIRA.

Eligibility to contribute

Income taxtreatment

Penalty for early

withdrawal

Penalty for late

withdrawal

401(k) rollover options

27

Your To-Do List Before putting money into an IRA, contribute

the maximum amount to your 401(k) or similar work-based retirement account.

For an overview of the types of IRAs and how they work, visit the retirement planning section of AARP’s website, www.aarp.org/money.

Compare traditional and Roth IRA options. UseMorningstar’sIRAcomparisoncalculatorat http://screen.morningstar.com/IRA/ IRAcalculator.html to figure out which type would likely provide you with more retirement income.

Use the same Morningstar comparison calculator to decide if it makes financial sense for you to roll money from your traditional IRA into a Roth.

Ask about fees and investment options before choosing a provider, and compare. Some comparisonsareavailableonTheMotleyFoolwebsite, www.fool.com/ira/ira01.htm.

For details on how different types of IRAs work, read IRS Publication 590, “Individual Retirement Arrangements” at www.irs.gov/ publications/p590.

This and other tip sheets provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice. © AARP 2009.

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601EStreet,NW|Washington,DC20049|www.aarp.org D18658(409)29

401(k) PlansDo you have a retirement savings plan at work? These are usually called 401(k)s. If you work for a government or at a nonprofit, your plan might be called a 403(b) or a 457.The best way to get on your road to retirement is to contribute regularly to one of these plans. As with an IRA, a 401(k) offers tax incentives to save for your future. If your employer has a plan and you aren’t contributing, sign up now. If you don’t have a plan through work, set up an Individual Retirement Account (see AARP’s “IRA” Tip Sheet for help).

These plans all generally work in the same way, but each has its own rules. Ask your human resources office for the Summary Plan Description to learn the rules of your plan. Here’s what you need to do to get your 401(k) savings going:

Sign UpSign up for a 401(k) when you start a new job. The money goes from your paycheck into your account automatically.

Choose a PlanYour employer may offer a traditional 401(k) or a Roth 401(k). Here are the basic differences.

• Traditional 401(k) plan. You don’t pay taxes on the money in the year you put it into the account. But you’ll have to pay income tax on your contributions and earnings when you take the money out.

• Roth 401(k) option. You pay income taxes when you put money into the account, but you usually won’t be taxed on the contributions or the gains when you withdraw it.

Decide How Much to ContributeCurrently, if you are less than 50 years old, you can contribute up to $16,500, depending on your sal-ary and the company’s rules. If you’re 50 or older, you can make a “catch-up” contribution of an extra $5,500 a year. The amount you can contribute may

change annually, so check with your plan or with a financial professional to learn about the maximum contribution. If your employer offers a Roth 401(k), you can split your contributions between it and the traditional plan, but the limit stays the same.

Save as much as you can. If you’re starting in your 20s, save at least 10 percent of pay (count the employer match). Save more if you’re getting a later start.

Take the MatchMany employers offer matching contributions to encourage you to participate in the plan. The match is generally cents on the dollar up to a certain per-cent of your salary. For example, your employer may also contribute 50 cents for every dollar you put into the account, up to six percent of your pay. But don’t assume that “saving to the match” is enough. Put in as much money as you can, up to the annual limit.

Choose Investments WiselyYou choose your investments in a 401(k) from a range of stocks, bonds and mutual funds selected by your employer. Follow these helpful tips:

• Payattentiontoeachinvestmentreturn.Isallyour money in the “safe” option? If the return is less than the inflation rate, you’re losing money.

• Diversifyyourinvestments.Thissimplymeansyou should not put all of your money into one class of funds or other investments. If you spread the money around, when one investment is down, there’s at least a chance another one will be doing well.

• Limityourinvestmentinemployerstock.Ifthecompany falls on hard times—as happened with Enron and World Com—you could lose some or all of your retirement savings.

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• Considerpickingalifecycleortargetdateretire-ment fund that’s based on your estimated retire-ment date. If you put all of your contributions into this option, they automatically go into a diversity of investments.

• Considerindexfunds.Theyareasimplebut powerful way to reduce fees, and to improve and achieve diversification.

Beware of Fees Mutual fund fees are subtracted from your account. If you choose a fund with a 1.5 percent fee, then it has to earn at least 1.5 percent for you to just break even. The lower the fee, the better. If you’re not sure what fees you are paying, ask your employer.

Pay AttentionIt’s easy to just let the money roll into your account without paying attention to the results. Read your account statements and if you’re concerned that an investment is not doing well, consider making a change.

Save Your SavingsThe whole idea of a 401(k) plan is to save for retire-ment, so don’t work against it. Taking a loan from your plan is not a good idea. Why? Because the money in your account won’t grow if it’s not there; you may pay loan fees; you have to pay it back in full if you change jobs; and if you default, you pay taxes and penalties.

Cash Out WiselyWhen you leave a job, you’re allowed to take the money out of your 401(k). Don’t spend it! You’ll have to pay a 10 percent penalty on the money and, in most cases, unless you’re older than 591/2, and you’ll also have to pay income taxes on it. You’ll also sac-rifice the potential for future earnings. Instead, ask your employer to roll over the money from your plan to your new employer’s plan, or open a Rollover IRA.

Your 401(k) plan is a powerful engine in driving along your financial roadmap to retirement. Follow your “to-do” list to set yourself on the right path to your savings goal.

Keep an Eye on Your 401(k)Consider these issues when you review your account statements:

Am I increasing my contribution every time I get a pay raise?

Do I have the right investment mix? For more informa-tion on how to figure this out, read about allocating your money at www.aarp.org/money.

Do I need to rebalance my investments? For information on how rebalancing helps you stay on track, visit www.aarp.org/money.

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Your To-Do List: If your employer offers a plan and you have not

signed up, enroll now. Contact your HR office and request the Summary Plan Description and an enrollment form.

Use AARP’s Retirement Planning Calculator at www.aarp.org/moneytools to help decide how much to contribute to your 401(k).

To learn how to roll money out of your 401(k) into an IRA go to www.rolloveraid.com/ 401krollover.htm.

To learn how 401(k)s work, go to www.401khelpcenter.com.

Read “A Look At 401(k) Fees” on the U.S. DepartmentofLaborwebsitewww.dol.gov/ ebsa/publications/401k_employee.html to learn how fees can cut into your savings.

Figure out how much of your own 401(k) savings go to fees. Add them up using the mutual fund cost calculator at www.sec.gov.

Find out if you are eligible for the Retirement Savings Contributions Credit on your federal income tax. For 2008, you may qualify if your income is below $53,000 (filing jointly), or below $39,750 (filing single). For 2009, the limits go up to $55,500 and $41,625, respectively. Visit www.irs.gov/publications/p590/index.html to learn more.

See how your savings can grow with the AARP 401(k) Savings Calculator at www.aarp.org/moneytools.


This and other tip sheets provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.Special thanks to The Actuarial Foundation for their expertise on this project. © AARP 2009.

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AnnuitiesOne of the biggest challenges you will encounter on your journey toward retirement is how to make your financial resources last as long as you need them. For some people, buying an annuity—an insurance contract, which can provide you with a regular income stream—can be reassuring. There are many types of annuities with different costs and benefits. So, if you’re considering buying one, you should do two types of research:

• Comparethecostsandbenefitsofannuitieswith other options you may have for retire-ment income. Some people may prefer to keep their money in savings accounts or investments (including real estate) where they feel they have more control and easier access to it; and,

• Comparedifferenttypesofannuitiestoseewhichoffers the most reliable, highest income on the best terms.

Things to think about if you’re considering an annuity should be your current age, the number of years you expect to live in retirement, and the amount of income you’ll have from Social Security, a pension, and/or other investments such as mutual funds or real estate.

How Annuities WorkWhen you buy an annuity, you pay a certain amount of money in return for future income. The contract you sign with the insurance company spells out the terms of the policy and the exact amount of income you will receive, and for how long. That amount is based on the type of annuity you choose and on the insurance company’s estimate of your life expec-tancy.

Here’s a general example of how an annuity may work: A 65-year-old husband and his 60-year-old wife buy an annuity for $100,000. While they are both alive, they receive an income of $541 each month. After one passes away, the survivor receives two-

thirds of that amount, or $357 per month.

The decision whether to buy an annuity usually arises when you are close to retirement and are trying to figure out how to manage your retirement income and decide what to do with your 401(k) or other retirement savings. Some employers have arranged for their employees to use the money in their retire-ment accounts to buy a particular annuity. If you receive such an offer, compare the terms of that annuity with what you can receive for a similar amount of money in other annuities and other investments.

Types of AnnuitiesInsurance companies sell two main types of annuities—fixed and variable—but each company has its own products, with different costs and features. Here’s a general description of how fixed and variable annuities work.

Fixed Annuity: Pays you a certain amount of interest—say 5 percent—for a certain number of years. After that, the interest rate can be changed, depending on the formula in the contract. There are two types of fixed income annuities:

• Fixedincomedeferred:Withadeferredannuity,you start making payments before you collect any income. When you are ready to retire, you con-vert it to an immediate annuity and start receiv-ing the income. Some people choose to put some of their savings into a deferred annuity as part of their retirement savings strategy.

• Fixedincomeimmediate:Inthiscaseyoupaytheentire amount to buy the annuity at once—for

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example, with money from your 401(k)—and you start to receive income immediately.

Variable annuity: The money you pay to buy this type of annuity is invested in financial products such as money market funds or stock or index funds. As with a fixed annuity, you can buy either a deferred or immediate variable annuity.

Variable annuities carry more risk than fixed. Be sure you fully understand these risks before deciding whether to buy one:

• Theamountofincomeyoureceiveisnot guaranteed. It varies, depending on how the investments are doing.

• Variableannuitysalescommissionsandfeesaresomeofthehighestintheindustry.Comparethecommission and all other fees to those of other investment opportunities. Be sure to find out about “surrender charges”—fees that can range from 6 to 7 percent of your investment—if you pull the money out of the annuity early.

• Insomecases,annuitiescanincreasetheinves-tor’s tax burden and can stick heirs with large tax bills. Once the investor starts withdrawing money from an annuity, the capital gains are taxed as ordinary income rather than at the lower capital-gains rates.

• Youneedtobewareofaggressivemarketing and tactics used to convince the public to buy complicated annuities without understanding how they work. The U.S. Securities and Exchange CommissionandtheNationalAssociationofSecurities Dealers have warned the public and fined some sellers of variable annuities for aggressive or fraudulent sales tactics. So before you buy a variable annuity, check with your state insurance and securities departments to verify that the product is registered and the sales agent is appropriately licensed.

• Usetheresourcesinthe“To-DoList”atthe end of this Tip Sheet to make sure you clearly understand exactly how a variable annuity you’re considering would work, and what all the costs are.

Before You BuyThere are so many different annuities, and it can be expensive to get out of an annuity you’ve bought. So don’t buy a specific product until you are comfortable with your answers to these questions:

• Didyoucomparison-shop?Whetheryouwantanannuity that’s fixed or variable, are you sure you havethebestdeal?

• Doyouhaveacompletelistofthechargesandfees?Becausetheyaremanagedbyinvestmentadvisors, variable annuities often cost more than fixed annuities.

• Haveyouresearchedthefinancialstabilityoftheinsurancecompany?Donotmakealong-termpurchase, such as an annuity, from a company that’s financially weak.

• Whatbenefitswillyourspousereceiveifyoushoulddiefirst?

• Whatarethe“surrenderfees”ifyoudecideyouwanttogetoutofthecontract?Thesemaybeabout 6 or 7 percent, if you decide to opt out any time in the first several years.

• Foravariableannuity,whathasbeenthe historic return on the funds where your money wouldbeinvested?Howdoesitcompareto overallmarketreturns?

• Forafixedannuity,makesurethatthe guaranteed interest rate has a good chance of being higher than the inflation rate.

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This and other tip sheets provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.© AARP 2009.

Your To-Do List: Use AARP’s online Retirement Planning

Calculator at www.aarp.org/money to figure out all your sources of retirement income to help you decide if an annuity is right for you.

Get detailed explanations of the different types of annuities and their pros and cons at http://money.cnn.com/retirement/guide.

Use an Annuity Calculator at www.moneychimp.com/calculator/ annuity to determine how much income you will receive, should you decide to purchase an annuity.

For checklists, tax information and other tips to help decide if you should buy an immediate annuity, read this booklet, “MakingYourMoneyLastforaLifetime: WhyYouNeedtoKnowAboutAnnuities,” by the Actuarial Foundation and the Women’s Institute for a Secure Retirement at www.actuarialfoundation.org/consumer/ wiser_annuities.htm.

If you’re considering buying a variable annuity,readtheSEC’spamphlet,“VariableAnnuities—WhatYoushouldKnow,”ontheirwebsite at www.sec.gov/pdf/varannty.pdf, and investor alerts at www.finra.org/ investors.

To learn when and how much income tax you must pay on an annuity, see “Tax Topic 410—Pensions and Annuities,” on the IRS website, www.irs.gov/taxtopics/tc410.html.

To check out the financial status of the insurance company selling an annuity, go to www.insureuonline.org/, a website created by state insurance regulators. The site can link you to the website of your state insurance office, which may include consumer informa-tion.

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Pensions

Are you earning a pension benefit now, or have you earned one from a formerjob? Traditional pension plans are a dying breed, but millions of workers arestill earning a right to one. You need to know if you’re one of them.

How They WorkA traditional pension, called a “defined benefit” plan,rewards long-term employees with a regular, usuallymonthly, pension payment when they retire. Find outif your employer offers a pension plan by contactingthe human resources department. If you have apension, request the Summary Plan Description(SPD) that details the plan rules. However, pensionplans for government employees follow different rules.

How Pensions Are Funded:• The employer typically makes all the

contributions;

• The employer invests the money to be able to pay out promised benefits; and

• A federal agency, the Pension Benefit GuarantyCorporation (PBGC) will pay a pension toemployees of firms that close their pension plans,but the amount may be less than what waspromised by the employer.

How Benefits Are Determined:• Most plans require you to work a certain number

of years—typically five—to earn a right to, or tovest in, a benefit.

• The amount of your pension is based generallyon your years of employment and your salary inyour final years.

• Your earned benefit is guaranteed. But the sponsor has a right to change or discontinue theplan at any time, as long as the company providesnotice required by law to the employees.

• If the plan is discontinued, you won’t earn anymore benefits.

The PayoutMost employers have traditionally paid out amonthly check for life beginning at retirement butsome permit you to take the benefit as a single lumpsum. Also, if you have a vested benefit and youchange jobs, your employer can require you to takethe money with you if it’s $5,000 or less.

There are good reasons to select a monthly pension,rather than a lump sum:

• You’ll get a monthly check for life. If you’remarried, your benefit typically defaults to a joint-and-survivor pension that your spouse wouldreceive if he or she outlives you. (To change this,your spouse would have to sign a consent form.)

The Summary Plan Description: A Guide to Your Pension Plan The U.S. Department of Labor requires employers to providetheir employees with this explanation of how their pensionplan works. If you’re in a plan, you should request and readthe SPD, and ask human resources staff to answer anyquestions you have about it.

Read through the SPD to find out:• If you qualify for a benefit;• Your options for how to receive your benefit;• What benefits you might lose if you take a lump sum

rather than an annuity;• How Social Security benefits might reduce your pension

amount; and• How long you need to stay to earn a right to a benefit.

Plan to stay with your employer at least as long as yourbenefit continues to grow.

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Your To-Do List: When considering a new job, look carefully at

the benefits. Ask for information in writing tocompare your current benefits versus what thenew job offers.

Ask your employer how much your benefit isworth now, what it would be if you stayed a fewyears longer, and what it would be if you stayeduntil retirement age. Starting in 2007, employerswith traditional pension plans are required to give vested employees a statement of theirbenefits. However, they’re also required to giveyou such a summary once a year, if you ask forit in writing.

Get legal advice if you are divorcing, withregards to your or your spouse’s pension.

Get advice on the best way to collect your pension—an annuity or a lump sum. For tipson choosing a financial professional, see AARP’sTip Sheet “Working With a Financial Planner.”

If you think you earned a pension from aprevious job but you can’t reach the company,contact the PBGC at www.pbgc.gov or 1-800-400-7242.

Find out if your pension plan is financiallyhealthy by contacting the Pension BenefitGuaranty Corporation at www.pbgc.gov or 1-800-400-7242.

Order other Money Matters Tips Sheets toshare with friends at www.aarp.org/orderfinan-cialpubs.

• You don’t have to manage or invest the money.

• You may get to keep other retiree benefits, likeperiodic pension increases and retiree health.

On the other hand, a lump sum could make sense foryou, because it:

• Makes it easier for you to leave an inheritance;

• Gives you the full benefit upfront if your healthstatus suggests you may not live very long inretirement; and

• Allows you to buy an annuity of your ownchoosing with a portion of the moneyimmediately or down the road.

Many people get diverted from their retirement pathbecause they spend their pension money when theychange jobs. If you do this, you’ll lose the value of themoney now, plus the value of the earnings on themoney in the years before you retire. If your employ-er lets you cash out your pension benefit when youchange jobs and you choose to do so, transfer themoney to the new employer’s 401(k) or open arollover IRA. Also, transferring the pension money toone of these other accounts will make it easier tokeep track of all your retirement benefits.

A word of caution if you divorce: every state viewspensions as a joint asset. However, the division of the benefit doesn’t occur automatically, and not alllawyers know how to deal with the issue. You andyour spouse should make joint decisions aboutpension assets.

601 E Street, NW | Washington, DC 20049 | www.aarp.org

Is Your Pension Safe?In the last decade or so, the number of private-sectoremployees covered by a traditional pension plan has plum-meted from about half to about 20 percent. In many cases,announcements that a plan was frozen or shutting downcame with little or no warning, leaving some employeeswith unexpected reductions in benefits at the time of termi-nation. Starting in 2008, a new law requires employers toprovide employees with more complete and current infor-mation about the health of their pension plan. Your employ-er is already required to provide you with two notices thatcould indicate a problem: a “participant notice,” if the pen-sion plan is funded below 80% or 90% in recent years, anda “Summary Annual Report” with information on issuessuch as the return on your pension plans’ investments. Askyour human resources department for them.

D18659(608)

This and other tip sheets provide general financial information; it is not meant to substitute for, or tosupersede, professional or legal advice.© AARP 2008.

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