Financial Literacy 2007 - Retirement
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Protecting a caregiver's retirement savings

Most companies have vesting periods, the time period you must be employed before you qualify to keep 100 percent of employer contributions that have been put into a 401(k), 403(b) or other plan on your behalf. Ditto for pensions. If working a few more months before you leave to care for loved ones means keeping more of your pension or 401(k) balance, it may be well worth it to stay, says David Wray, executive director of the Profit Sharing/401(k) Council of America.

"The typical vesting schedule in a 401(k) plan is a five-year graduated schedule, which means you vest an additional 20 percent a year of the company contributions. In a traditional pension plan, you basically have to work for five years before you qualify for benefits," says Wray. "So clearly, if you're in a traditional pension plan or a 401(k) and you can work six more months to be there five years and qualify for the entire benefit, it's worth it to stay. But I think many people find it hard to pay attention to these kinds of issues when they're facing more immediate challenges of caring for family members or changing a job."

4. Plan on working longer down the road.

It's not an option that's going to make you smile, but working extra years will directly impact the size of your future Social Security check. That's because Social Security benefits are based on your highest 35 years of earnings. Years you earned nothing because you were at home would be included in this calculation unless you replace them with working years.

Another option? Consider scaling back to a part-time schedule so you can have some earnings for your Social Security calculation. Another reason to keep working outside the home is that it will help keep your skills sharp and your resume current, making it easier for you to find work once you're ready to go back full time.

5. Make up for lost ground.

If you're re-entering the work force after taking time off to raise a family, immediately begin contributing to a retirement plan. And if you're 50 or older, take advantage of catch-up provisions that let you save more in IRAs and employer-sponsored plans like a 401(k).

Individuals who turn 50 in 2007 can save an extra $1,000 in an IRA for a total of $5,000. And employees who've reached 50 by year's end can put an additional $5,000 into a 401(k), or up to $20,500.

That can help you make up a lot. For example, a 50-year-old who makes the full 401(k) plus catch-up this year, and keeps doing it until she's 70½, when she must start taking withdrawals from the account, will amass about $1,064,000, assuming assets grow at 8 percent annually. That's roughly $247,000 more than what she would have saved over the same time period if she had not taken advantage of the $5,000 catch-up.

6. Safeguard existing savings

. Nothing like leaving work to put a crimp on the wallet. That's all the more reason to create a budget and stick to it. Likewise, resist all temptation to raid the assets you amassed from the days when you were working.

Gail Cunningham, a counselor with Consumer Credit Counseling Service in Dallas, says she's worked with clients who've done huge financial damage by raiding retirement savings when they had no other income as an at-home spouse. "People take the 401(k) and use it on their home to redo a kid's room or a kitchen. That isn't a good choice," she says.

7. Turn parents into a deduction

. If you are spending big money to care for an aging parent who doesn't have much income, or who's primarily relying on Social Security to get by, it might be time to claim them as a dependent.

To qualify, a parent's individual's gross income can't exceed $3,700. But he or she doesn't have to move. That's because the tax code "doesn't require they be in your home to be a dependent," says Mark Luscombe, principal tax analyst at tax publisher CCH.

If they do qualify for dependent status, there are additional potential tax breaks. Money you've spent on medical costs -- and this includes expenses for anyone in the family who's dependent on you, as well as yourself and your spouse -- can be used as a tax deduction if those health care expenditures exceed 7.5 percent of your adjusted gross income in any given year.

If costs don't meet this threshold, look to other tax-saving options, such as flexible spending accounts, or FSAs. Offered by employers, they allow you to set aside pretax dollars from your salary for such things as unreimbursed prescriptions, doctor co-payments, even a wheelchair ramp or other medically necessary improvements you add to a home. (For a complete list of eligible expenses, go to the IRS Web site,, and download Publication 502.) You get reimbursed from your FSA after you spend out-of-pocket funds and submit a receipt.

Finally, don't overlook the child- and dependent-care tax credit. It can apply to a parent who's "physically and mentally incapable of taking care of themselves, but they have to be in the same home as you for more than half the year," says Luscombe. This year, the credit for one dependent tops out at $1,040, subject to factors including your tax bracket and out-of-pocket expenses.

Break the rules. Talk about money. These days, a fifth of baby boomers age 45 and older provide financial support for their parents, paying on average $240 a month, according to one study by Putnam Investments. Those gifts don't come cheap. In fact, 44 percent of individuals who are bankrolling an older parent say they'll have to work during retirement as a result.

If you're likely to care for mom or dad, be prepared to do so. That means sitting them down for a heart-to-heart.

"You'll never look at your parents as an expense, but from a financial perspective, you have to ask 'Are they OK? Did they save enough?'" says Dick Bellmer, chairman of National Association of Personal Financial Advisors. "I know talking to your parents about money is impossible for most people. You might as well ask how many times they made love last week. But try to have that conversation with them."

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