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Retirement Planning & Investing
Retirement is changing and the way to define it is largely a matter of personal preferences. It's no longer an end. Rather, retirement is a transition to a new stage of life - with opportunities and advantages that have never existed before.
Retirement planning should begin long before you're old enough to retire, but it shouldn't stop there. Many of us will spend 30-35 or more years in retirement, raising concerns about outliving our money. The cost of goods and services continue to rise and Social Security is only a foundation, at best.
The Social Security Administration estimates that your Social Security benefits will provide only one-quarter to one-third of the amount you'll need. The rest will have to come from your company's retirement plan or from your personal savings.
Plan with an eye to your future needs
Your retirement plan will provide the financial foundation for your future well-being. It should contain the financial pathway to achieving the level of financial security you hope to have after you retire.
Even when you retire, you'll want to review it on a regular basis and update it when necessary. As you plan or re-plan, you should spend ample time considering a few important factors:
- Analyze your financial situation - Project the amount of money you will need to support yourself and any family members going forward. Consider your current financial situation and your indebtedness. Plan for potential major life events - the death of a spouse or child, birth of a child, marriage, major illness, long term care.
- Establish objectives - How close do you want your retirement standard of living to mirror your pre-retirement lifestyle? As much as possible, include in your planning every potential aspect of retirement, including activities you may want to do after retirement but don't do now - more travel or a new hobby, for example.
- Look at how you invest - How much of a risk-taker are you? Generally, younger people are more willing to assume greater investment risks. Older people, on the other hand, usually are more conservative. Are you a short-term or long-term investor? Short-term investments - those with time horizons of five years or less - are usually considered more risky. Many financial advisors lean toward more conservative investments as retirement approaches and begins.
- Review your tax situation - What's your tax situation? How will the situation change after you retire?
- Review your investments - Do you already have an investment portfolio? What investments are included? Are you satisfied with their performance? Are they meeting your income needs now and do you anticipate that they will continue to do so after retirement?
Choose from a variety of retirement savings options
The retirement savings options listed here are commonly considered during the retirement planning process. Each of these savings options is funded by a variety of investment choices - stocks, government and corporate, U.S. Treasury notes, mutual funds, money market instruments, certificates of deposits and other securitized investment vehicles.
- Company pension plans - To establish a company pension plan, your employer invests in a pension fund or trust for employees who met the requirements of the plan (i.e., age, years of service, full-time vs. part-time, etc.).
- Simplified Employee Pension (SEP) - SEP plans are provided by sole proprietors or small businesses and corporations that have no other retirement plan.
- 457 deferred compensation plans - These plans are available to employees of city or state governments. A 457 deferred compensation plan permits employees to defer taxes on both the income they invest and the earnings of their investment until some later date.
- 403(b) tax-deferred annuity - If you work for a nonprofit organization, you may be able to earn retirement income from a 403(b) tax-deferred annuity. "Annuitants" receive the benefit of tax-deferred compounding for as long they keep their money invested in the annuity. Earnings are taxed at the annuitant's regular tax rate at the time of withdrawal. A Roth option may also be available.
- 401(k) plans - Many businesses now offer 401(k) plans as the primary retirement savings option for their employees. Most companies match a portion of their employees' contribution to a 401(k) plan. No taxes are due on contributions and any investment earnings until funds are withdrawn from the plan. Some 401(k) plans now also offer a Roth option, referred to as a "Roth 401(k)."
- Individual Retirement Arrangements (IRA) - An IRA is the most common form of tax-deferred retirement plan. It's personal rather than company-sponsored.
Deductibility of IRA contributions is limited for some taxpayers depending on their income and the availability of a pension plan at their work.
- Traditional IRA - All or part of your IRA contribution is generally deductible from your taxable income, depending on your income level. Your contributions and earnings accumulate tax-free but are subject to taxation when they are withdrawn.
- Roth IRA - With a Roth IRA, you receive no up-front tax deduction for annual contributions. But, if you meet the rules of the tax law, your contributions and earnings can be withdrawn tax-free. A Roth IRA can be started by a person of any age, as long as the person is otherwise eligible.
Start planning for your retirement today
Good retirement planning is for a lifetime. Ideally as soon as you begin having an income is the time to start planning and saving for your retirement. Long-term saving and investing has proven to be an excellent way to help ensure that you will have the funds you need to enjoy your golden years. Plan for retirement today.