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By Jerrod L. Foresman
Do you know how much you can expect from Social Security in retirement -- or from any pension plan you have? How much do you need to save to cover the shortfall in your desired retirement income, and where should you put your savings? And are your retirement investments adequately diversified?
Whether you're five or 25 years from retirement, now's the time to get your retirement plan on track. Here's how to get started:
Estimate your retirement income and expenses. The standard advice used to be that for each year in retirement you'd need about 70% to 80% of your pre-retirement expenses. But with longer life expectancies and more active retirement lifestyles, this traditional formula may leave you short. So take the time to make a more accurate estimate.
Make the most of your employer-sponsored retirement plan. If you have access to a tax-favored employer-sponsored retirement plan, such as a 401(k), a 403(b) plan, or a 457 governmental plan, make every effort to contribute the maximum allowed. With these plans you don't have to pay income taxes on the amount you contribute until you make withdrawals, and your earnings grow on a tax-deferred basis.
Contribute to an IRA. Boost your retirement savings by starting an IRA or adding to your existing one. With a Roth IRA, if you're eligible to contribute and if you meet the specified withdrawal conditions, you can withdraw your earnings free from federal income tax. With a traditional IRA, you don't have to pay income taxes on your earnings until withdrawal, and if you're eligible, you can make tax-deductible contributions.
Invest wisely. Evaluate your current investment mix and set your target asset allocation plan. An asset allocation plan is your policy for how your money will be divided among the different types of savings and investments, and among the categories within these main types. Dividing your money among the different types of assets is a time-tested way that may help reduce risk, as well as a way to smooth out your portfolio's ups and downs.
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