Guide to Socially Responsible Investing

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Setting Retirement Goals

Even in this uncertain economy, saving for retirement is essential. While financial experts used to boast that the stock market appreciated an average of 10.9 percent over the long-term, the truth is that the market has remained stagnant or gone down for the past ten years. Investors may not be able to count on the kind of market appreciation they enjoyed in the past.

Traditionally, financial advisors have encouraged young people under age 40 to have more risky investments in theirportfolios, to pave the way for increased growth opportunities in the long-term—and they’ve urged those age 40 and above to decrease their financial risks by putting more money into conservative investments to keep their nest eggs stable. Many experts say this is still good advice, but all of us will likely have to save more than financial advisors projected during the bull markets of the 1990s, to make ends meet later in life. Save early, save often, and start now.

How much you set aside for retirement depends on your age, income, when you plan to retire, and how much money you want to have when you do so. Below are a few options for making the most of your retirement savings. Because rules about these plans are complicated and change often, it’s best to check with a tax planner or investment advisor first.

IRAs
Anyone who can afford to set aside even a small amount of money should invest in an Individual Retirement Account(IRA). If you’re employed or self-employed, you can establish a Traditional IRA and contribute up to $5,000 a year ($6,000 if you’re over 50) while claiming a tax deduction for that amount if you qualify (see the chart below for eligibility). No tax is paid on any contributions or gains in your account until you withdraw
funds—and upon retirement, your tax bracket may be lower.

Another option is the Roth IRA. Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible. However, the Roth IRA allows for tax-free qualified withdrawal. Therefore, many advisors will recommend a Roth IRA for their clients over a traditional IRA, because while you’ll pay tax on the principal, you will never pay tax on the profits you make. (Whether one or the other is best for you depends on many individualized factors, so check with a financial planner before making a decision.)

IRA accounts are professionally managed and can include stocks, bonds, bank certificates, mutual funds, money market funds, and more. You can also choose a self directed IRA where you manage your own investments.

Most IRA withdrawals are subject to heavy penalties before age 59½. If you’re over that age and still earning, IRAs make an ideal savings account since you can enjoy the tax advantages and are free from withdrawal penalties. You must take distributions at age 70½, though you may continue to contribute if you still earn income.

Annuities
If you’re concerned that your savings won’t carry you through retirement, consider a fixed annuity. These are purchased from insurance companies with single or periodic payments— and they offer guaranteed monthly income for life. As with an IRA, the income accumulates tax-deferred until you begin withdrawals, which are partially taxed.

When you retire, several payout options are available through annuities. A straight life annuity pays income monthly from retirement through death, with no benefits due to anyone at your death. A life annuity with certain installments pays you income for life with a specified minimum number of years. If you die, the balance of the income promised to you goes to your beneficiary. A refund annuity pays you for life or until the payouts equal the premium paid. If you die before then, your beneficiary receives a refund.

Remember, your principal in an annuity is only protected as long as the insurance company through which it is issued stays solvent, so it pays to comparison shop. When choosing an annuity plan, look for companies that have the highest ratings from the four annuity rating companies: Fitch (www.fitchibca.com), A.M. Best (www.ambest.com), Standard & Poor (www.standardandpoor.com), and Moody’s (www.moodys.com). (What constitutes a high rating differs with each company.) Also, look closely for sales charges, service charges or loads, and other expenses. Research the minimum interest rate guarantee, current interest rate, and withdrawal penalties. Since annuity payments are fixed, they may not keep up with inflation.

Other Options
Look into an employer-sponsored 401(k) with for-profit companies and 403(b) plans with nonprofits. These
plans allow savings to accumulate and compound tax-free until retirement— and often, employers will give you matching contributions. Self-employed people can open a SIMPLE IRA that allows you to save up to $11,500, with an employer match of up to three percent of your salary. A Simplified Employee Pension Plan (SEP) allows you to contribute 25 percent of your income or $49,000, whichever is less, on a tax-deferred basis. You can put your money in any of the investment vehicles you would use for an IRA, and the withdrawal rules are the same. You can contribute as long as you are earning income, even past age 70½.

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