Will you be ready for retirement?
Everyone grows old. It’s inevitable. The question is, will you be ready when retirement gets here? We all know it’s coming, but unfortunately, few of us are adequately prepared for its arrival. There are several things we can do to prepare for retiring, even if that fateful day is looming larger in the immediate future than is truly comfortable to consider.
When making your retirement plans you have to consider several things. First, why am I planning? What is your motivation, reason for planning? Also, what plans are out there? There are many paths to the same goal. Finally, of those paths, which one is right for you?
Why should I plan?
You might be thinking, why should I think about retirement now? I’m young and fit, I can think about it later. This procrastination can be a costly and financially dangerous mistake. Everyone should be looking to the future and planning for the day that they will no longer want or be able to work to earn a livelihood. The fact is, average life expectancy in the US is 78.2 years. Most people will retire well before that age.
Furthermore, those individuals who think Social Security will be enough are fooling themselves. That program was never intended to and never will take the place of good retirement planning, for employer or employee. There will always be a need to supplement this government provision. Individuals who plan their retirement are able to supplement this base income with other sources that greatly improve income potential over the course of a retirement.
What are the most common plans?
So, you may be asking, what are the plans available? Here are some of the most frequently used and most popular:
- IRA’s are individual retirement accounts. These accounts are, as the name indicates, savings accounts started by the individual for the purpose of having income at the time of retirement. There are a couple of different types of IRA’s.
- Traditional IRA: This is a tax deferred account. Money isn’t taxed until it is withdrawn and there is a penalty for early withdrawal before age 59 ½. The government also limits the dollar amount of contributions during the year. Those amounts increase after age 50. In addition, if an employee also participates in an employer’s pension plan these contributions are further limited.
- Roth IRA: This is a plan born in 1998 out of the Taxpayer Relief Act of 1997. It is named for one of its biggest supporters, Senator William V. Roth, Jr. A Roth IRA behaves much like a traditional except that the initial contribution is not tax deductible and the interest earning from a Roth is not taxable income. In addition, if you withdraw any of your principal contributions at any time there is not a penalty.
Employer Sponsored Plans
- Defined Benefit Plan (DB): This plan allows for an equal amount to be paid out for a set number of months during retirement. This plan was popular in the 50’s and 60’s. During the 70’s many employers began moving to Defined Contribution plans.
- Defined Contribution Plan (DC): Under this plan the employer or the employee, or both, make a set contribution each month. This money is invested, either in mutual funds or, in some cases, in company stock. The return on this plan and the money at retirement is dependent on the performance of the investments.
- 401(k) Plans: This is the most popular, most used employer-sponsored plan. Typically contributions are made pre-tax and employers often match those contributions. Both employer contributions and growth or interest income is tax-deferred until withdrawal after age 59 ½.
- Profit Sharing Plans: In this plan the employer makes all contributions. Profit sharing is just what it sounds like. Business owners or employers decide the amount of profit they want to share with their employees and that becomes their contribution.
Which plan is best for me?
There are many factors to consider when looking at which retirement plan will be best for your particular situation.
- Eligibility: While all of the plans have their merits, not all individuals are eligible for all the plans. The first step you need to take is to look at the eligibility requirements and make sure you can even include it as an option.
- Benefits: Another consideration is the long term benefits of each plan. This is where a good, trusted financial planner is very useful. She would be able to enter your specific numbers and let you know which plan or combination of plans would be most beneficial for you.
- Flexibility: How flexible is the plan? How flexible do you need to plan to be? Looking at issues like early withdrawal of dividend or principal or the possibility of loans for hardship or other life events is essential when weighing the pros and cons of each plan.
- Taxes and costs: Another factor for many individuals is the extra costs incurred by specific plans. These costs include when taxes are paid on the money and fees associated with opening or maintaining the account. In addition, if your particular plan is connected to the stock market through mutual funds or company stock you always run the risk of losing profits based on the mood of the market.
- Age: You also need to consider your age when you begin your account. A person in their 20’s or 30’s can be a bit more aggressive and take a few more risks with their retirement investments. If you are in your 50’s you need to maximize your contributions and minimize risks.
Final Thoughts and Advice
Regardless of your age, retirement planning is essential in order to be prepared and comfortable in the golden years of life. Your goal should be simple, maximize your income potential and keep risks at a minimum.
When you begin to plan you will need to gather some tools and information in order to get a complete picture of your retirement options and goals. You will need:
- Financial planning website/software or a trusted accountant or financial planner
- Income information – check stubs or W-2’s
- Information about any investments/savings you already contribute to
- A list of your retirement goals – Do you want to be able to continue your current lifestyle or do you want to live in luxury?
- Pen and paper
As you go through the decision making and planning process you need to keep your goals in the forefront and decide what is going to be the best way to get there. There are many retirement planning sites on the Internet with a wealth of knowledge to share. These range from the IRS site to sites that charge for their services. A bit of savvy searching should lead you to a site to fit your needs and help you meet your goals.
We all want to be comfortable as we get older. No longer can we depend on employers to help us ensure that we will be financially stable as we age. We must take the initiative to make sure that we are taking care of our tomorrow by a bit of careful planning today.