The Changing Face Of Retirement

By Craig D. Flury



As the nation's Baby Boomer generation nears retirement, more and more Americans will increase their focus on retirement planning. Why? According to the American Council of Life Insurance, the number of people aged 65 and older will increase by nearly 50% over the next 25 years.

This dramatic increase in retirees could cause strains in the Social Security and Medicare systems. Because of this concern for the future of the Social Security system, many investors have begun to consider their personal retirement savings vital to their future retirement.

At the same time, the number of people working for small businesses is growing. High expenses and red tape deter many small businesses from offering tax-qualified retirement plans to their employees. Based on Small Business Administration (SBA) estimates, the smaller the business, the less likely it is to offer a company-sponsored retirement plan.

There are an estimated 23 million people who are not covered by company-sponsored retirement plans, many of whom work for small businesses. According to the SBA, only 19% of workers at companies with fewer than 25 employees have company retirement plans. In companies with 25-99 employees, 48% have plans. At companies with more than 100 employees, 83% offer company plans. Currently, companies with fewer than 100 employees employ 53% of private sector workers.

As Americans focus on retirement savings and a growing number work for companies that do not offer company-sponsored retirement plans, more investors will need to take control of their own retirement savings. Fortunately, there are savings options available if you are not covered by a retirement plan at work or would like to save more in addition to what you save through your company-sponsored plan.

Individual Retirement Accounts (IRAs) are personal retirement savings options that many investors can take advantage of. You may contribute up to the lesser of $3,000 (2003 limit) or 100% of your earned income, and any earnings grow tax-deferred until you withdraw the money. Up to $6,000 ($3,000 per individual) may be contributed to a wage earner's IRA and his or her non-wage earning spouse's IRA, as long as the combined compensation of both spouses is greater than or equal to the contribution. If you are age 50 or over you can make a "catch-up" contribution over and above the $3,000 limit of up to $500 per year. This catch-up contribution is also available for a non-working spouse who is at least age 50.

You have some choices when it comes to selecting an IRA - you can go with a "Traditional IRA" which may allow for tax-deductible contributions or a "Roth IRA" which, while never tax-deductible on the front end, does allow for tax-free distributions if held for a minimum of five years and distributed after age 59 1/2.

The ability to make tax-deductible contributions to the Traditional IRA hinges on whether you and/or your spouse are an active participant in an employer-sponsored retirement plan. If neither of you is an active participant, the contribution should be deductible. If one or both of you does participate in an employer plan, you will be limited as to the deductibility of your Traditional IRA contribution based on your Modified Adjusted Gross Income (MAGI).

The Roth IRA also applies some restrictions based on Modified Adjusted Gross Income, but these are for eligibility purposes. You can participate up to the full contribution limit if you are a single tax filer and your MAGI falls at or under $95,000. Joint filers can fully participate as long as MAGI is $150,000 or less. Single filers are phased out of participation between $95,000 and $110,000 MAGI, and joint filers are phased out of participation between $150,000 and $160,000 MAGI. Unfortunately the Roth is not a viable option for married persons filing separately - the phase-out range is 0-$10,000.

Saving for retirement is an important component of your overall financial plan. Contact a qualified financial professional for guidance in selecting investment vehicles that are right for you and fit into your overall financial plan.



Craig D. Flury is financial adviser and wealth management specialist of Legg Mason Wood Walker, Inc. He can be reached at 410-454-5564, by e-mail at cdflury@ leggmason.com or visit his web site at www.craigflury.fa.leggmason.com.