Why Plan for Retirement?

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This is a question that I come across quite often when researching and discussing retirement planning and options. Despite the constant news coverage of impending doom in regards to Social Security many Americans are still counting on their social security payments to support them through their retirement.

 

The sad fact is that it simply isn't possible because the money isn't there. Sadder still is the fact that even if the money were there, it is doubtful that it would be enough to get the average American through their twilight years.

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Americans are living longer than they have in decades past. In addition to longer lives we are leading more active lives. Gone are the days when retirees sat at home reading newspapers and mowing the lawn every other afternoon.

 

Today's retirees are traveling, taking classes, learning to dance, and trying new things that they didn't have the opportunity to experience while setting aside funds for the future and going about the business of raising their own families. Now they are taking the time to do all these great things and these wonderful activities and pastimes require funds in order to enjoy.

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This is the number one reason you should begin as early as possible not only setting aside funds for your retirement but making active plans on methods by which you can invest those funds in order to maximize the potential of limited funds.

 

This is the time that it is best to take your plans, goals, and concerns to a financial planner and see what advice he or she can give you on setting specific goals, better defining your plans, and making the most of your investment means while establishing a realistic investment strategy that will not leave you feeling strapped for cash month after month.

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We often overlook the important role that a good financial planner and good planning play in our financial futures. The same could be said of our financial retirements. We need to take every opportunity that is available to us in order to maximize our money.

 

A good financial advisor will know of funds and strategies that we have never heard of. It makes sense to go to an expert when it concerns our family's future. We see experts when it comes to matters of law, health, and taxes-why on earth shouldn't we see an expert for our finances?

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Why is it so important to have a plan? The long and short answer to this question is so that you won't end up needing a job in order to put food on your table once you've reached retirement age. The sad truth is that many of our retired citizens are finding themselves strapped for cash financially and barely able to make ends meet.

 

If they are fortunate enough to have homes that are paid for, they often find the property taxes are a little more than they can handle without some sort of assistance.

 

Medications are expensive despite government programs to keep costs down for our elderly, and then there are those who are simply living longer than their original retirement plans had accounted for.

 

Combine all these factors with the fact that the cost of living has gone through unprecedented increases over the last two decades and you have some very real reasons to make plans for your future retirement.

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It is best to begin making these plans as early as possible. It is not impossible to recover, however, if you begin the process a little later. The problem is that you will need to make some extra investments along the way in order to make up for lost time.

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The sooner you begin making plans for your financial retirement the healthier your retirement options will be. The best way to go about this is to define your retirement goals, make plans, and then take your goals and plans to a financial advisor and get his or her input. Investing smarter is much wiser than investing harder. 

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    Types of Retirement Plans

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We all know that there is a growing need in this country to take our retirements into our own hands if we want the funds necessary to have any quality of life upon retirement.

 

The problem is that most of us have no idea where to begin when it comes to financial retirement planning or investing. The sad news is that for most of our lives retirement was something that was taken care of if we put in an honest lifetime of work.

 

However, the climate has changed and the retirement funds that many of us have labored to pay for the vast majority of our lives are slipping away. 

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The good news is that this need has not gone unnoticed by the powers that be and while they aren't offering solutions for the funds we've already invested or in salvaging what is left of the failing system. 

 

They are empowering people to take some control for their personal retirements by offering investment options and strategies that provide tax benefits along the way in order to reward you for your efforts.

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The four common types of retirement plans include 401(K) plans, Keough Plans, IRAs (individual retirement accounts), and qualifying pension or profit sharing plans offered by corporations.

 

In most retirement plans, the contributions to those plans are tax deductible and taxes aren't paid on these plans until the funds are received and retirement payment begins.

 

You should be careful of your investments and guard them well as there are often hefty penalties involved when you take funds out of your retirement funds before you actually retire.

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These of course are not the only types of investments you can make for your golden years and it never hurts to have more eggs in many baskets. The more the merrier in most cases. My personal preference for investing is real estate.

 

This is an investment that you can actually see and reach out and touch. It is also an investment that often gets overlooked when planning for retirement, though when you consider it is an excellent choice. Property values are much lower today than they will be ten, twenty, or fifty years from now.

 

This means the sooner you buy the property the more it will be worth (in theory) when you retire. The thing to remember is that property investing, like other types of investing, requires some degree of risk.

 

You need to learn as much as you can about the process and discuss your interest with a financial advisor before you make any major decisions concerning your retirement investments.

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There are more traditional investment methods you may want to consider as well. Mutual funds and the stock market are great ways to invest your money, build a decent portfolio, and increase your net worth.

 

This type of investing also carries some degree of risk and isn't always considered financial retirement planning but more along the lines of simple financial planning. 

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The thing to remember is that it is always good to have a plan. For this reason, I strongly encourage you to engage the services of a good financial planner.

 

He or she can help you navigate the tricky language that is involved in many transactions, set realistic and obtainable retirement goals according to your needs as well as your means, and offer excellent advice and guidance on other investment ventures you may wish to pursue. In other words, a good financial planner can help you plan for your retirement.

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When it comes to the world of finance, many of us are far from experts. We seek legal advice from attorneys, tax advice from accountants, and medical advice from doctors yet very few of us go to financial planners when planning our financial retirement.

 

In many ways it makes little sense to approach our futures so carelessly and yet this is not something that our parents and grandparents would have done so there is no precedence for doing so.

 

The problem is that money is such a limited commodity in this world, we are living longer than ever before, and we are enjoying much more mobility in our golden years than in times long past.

 

We now need expert advice and guidance in order to insure that we are in the best possible position when the time comes to face our own retirements.

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          What are IRAs?

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With all the three letter names floating around our society what is one more? Really? It's not like we don't have enough to worry about without adding this burden.

 

However, when it comes to real life, these three letters will have a greater noticeable affect on people than many of the other three letter names that we here on a regular basis such as the CIA, FBI, NSB, ATF, and countless other abbreviations that are hidden behind three little letters.

 

The good news is that an IRA isn't nearly as insidious as its name would imply. This is a useful tool to most Americans who hope to someday retire from their life of work and life out a somewhat comfortable existence.

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There are actually many different IRAs, which is the abbreviation for individual retirement account.

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A Traditional IRA is the most common. The only requirement for this particular IRA is that you are employed and that you invest no more than 100% of your income or $4,000 per year, whichever is greater up to the age of 49.

 

At the age of 50 your maximum investment is 100% of your income or $5,000 whichever happens to be greater. If you meet the requirements of the IRS to their satisfaction your contributions to your traditional IRA will be tax deductible.

 

As a result, the funds are not taxed while in your IRA account but once the funds are withdrawn they are subject to federal income taxes.

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This is not necessarily a bad thing, particularly for those who plan to be in a lower tax bracket when the funds are withdrawn. However, there is a growing number of people who are interested in the benefits that Roth IRAs and similar funds present by paying the taxes now when the rates are known rather than risk an even higher rate of taxation in the future, even in a lower tax bracket. The best advice I can give is to discuss the matter thoroughly with your financial planner and listen to their advice. 

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This is a case where only you can ultimately decide which decision is best for your needs but he or she can provide valuable guidance. You should also keep in mind that though laws favor non-taxation for Roth contributions that could change between now and the time you are ready to withdraw your funds, which will have you paying double taxes on those funds and is the primary reason that many people elect to stick with Traditional IRAs instead.

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There are several distinct disadvantages to the traditional IRA funds. One of those would be the requirements in order to qualify for tax deductions. First of all, if you have the opportunity to invest in another retirement option through your employer you must be below a certain income level in order to qualify for the tax deduction.

 

If you do not meet that qualification all the funds that are deposited into your IRA fund are subject to federal income tax. You will need to seriously discuss your stock buying strategies before determining if this is the best choice for you as those who buy and hold tend to be penalized when it comes to capital gains.

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As things are currently, a Roth IRA is often preferable as the money isn't immediately tax deductible but not only is the investment not taxed upon withdrawal but neither are the gains that were earned on the investment.

 

Another serious setback when it comes to the traditional IRA is that you are required to begin receiving payments at age 70.5. As we are seeing more and more people work well beyond the traditional retirement age this is becoming more and more of an issue.

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There are advantages and disadvantages to traditional IRAs. It is important that you decide which of these you are prepared to live with and which you would rather live without.

 

These differences will matter a great deal when retirement comes. Take the time to discuss your goals for the future with your financial advisor and see what he or she recommends.

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              What is a 401(k)?

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When searching and sifting through copious amounts of confusing and conflicting information concerning financial retirement savings and plans it is quite likely that you have come across the term 401(k).

 

You may have wondered if that was the newest robot in the Star Wars saga but the truth of the matter is that it is a type of retirement savings plans that is designed so that employees and employers alike can contribute to a fund that is set aside for your future retirement.

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Many people invest pretax earnings into their 401(k) funds, which they then have the option to invest in mutual funds of many options. You will find these mutual funds in a wide array of choices from money market accounts to very aggressive and risky stock portfolios.

 

If you work for one of the many companies across the country that offers the option of a 401(k) plan you would be literally robbing your future self not to take advantage of this offering.

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There are 3 general types of contributions to 401(k) plans: matching contributions, elective contributions, and non-elective contributions. 

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Matching contributions are very nice from the standpoint of the employee as the employer matches a predetermined amount of the funds invested by the employee towards this fund.

 

Different companies will offer different amounts for their matching contributions. If your company will match up to a certain percentage of what you invest into your 401 (k) you should take them up on their offer.

 

This is money that will benefit you later in life and should not be thrown away without a darn good for doing so.

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An elective contribution is money that you invest before taxes are taken out of your salary. This means that you aren't paying income taxes on these funds at today's rate of taxation.

 

Many people believe this is a good plan because the assumption is that you will be in a lower tax bracket upon retirement though there are no guarantees that that will be true.

 

This money is money that you have elected to invest in your 401 (k) plan, rather than bring home in the form of salary, thus the name of elective contribution.

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Non-elective contributions are money that employer deposits into your account. In most cases you cannot opt to take this money as cash rather than an investment in your 401 (k) plan.

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There are limitations for how much you can invest into your 401 (k) plan on a given year. You should check with the IRS to get the actual numbers as they have changed over time and are likely to continue doing so as the cost of living increases across the country.

 

Once you reach the age of 50 you are allowed to make extra contributions to your plan in order to 'catch up' and better prepare for retirement.

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When studying your options for retirement financial planning you should carefully consider taking your employer up on any type of assistance they offer in this endeavor. If they offer to match the funds you invest in your retirement you can bet that money has already been deducted in their calculations of your salary.

 

In other words, they are giving you the money you've earned in a different manner. The good news is that when the time comes to retire you will be able to appreciate every dollar that has been invested along the way. 

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We could never hope to simply save the money that we will need in order to retire. Even investments are tricky for the vast majority of the population. For this reason, it is a wise investment plan to take advantage of any opportunity to increase your funds by employers matching your contributions.

 

Take the maximum benefit they will match and if you are seriously worried about your financial future more than your current financial situations, invest the maximum allowable amount each year in your 401 (k) plan.

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                IRA vs. 401 (k)

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Many people find all the options that are available when it comes to retirement planning to be quite confusing. If you are one of those this article is dedicated to explaining the differences between a 401 (k) plan and an IRA (Individual Retirement Account).

 

There will be many terms you will come across during your research that will be somewhat confusing until you get the terminology down. The path to financial doesn't have to be as complicated as we tend to make it. 

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I would like to take this opportunity to encourage you to seek the guidance and advice of a professional financial planner. The resources and knowledge that a competent financial advisor can share with you will be invaluable when it becomes time to make the decision that will affect how your retirement savings are put to work for your retirement.

 

We go to a mechanic for mechanical advice (at least I do) so it only makes sense that we would go someone who has trained in financial matters for financial advice.

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Getting back to business, when it comes to financial retirement planning you should find that both IRAs and 401 (k) plans have strengths and weaknesses.

 

There are also limitations as to how beneficial they can be when used in combination with one another as well as their own limitations. Every benefit that aids you in taxes and retirement should be considered carefully before leaping.

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Let's first look at the 401 (k) plan. This is a plan that offers a few benefits that are much preferable to many over other retirement plans. The first thing you might want to consider is that you can invest up to 15% of your salary or a maximum of $15,000 per year (as of 2006).

 

Of course that is assuming that your employer doesn't have limits on how much you can invest. The money invested in your 401 (k) account is pre tax money so it lowers the amount of taxes you are paying out of each paycheck.

 

Many people also find that because the money is taken from their checks before it arrives it is far less painless to part with. As someone who has closely watched taxes, FICA, and Fido get my money for years I can say that it is no less painful for me but some find it comforting and that is a real benefit.

 

Finally and perhaps the most important thing to consider is that many employers will match a percentage of your contribution up to a certain amount each check. As an employee this is a boost to your investment that is well deserved and hard earned. I hope you appreciate the implications it has on your future earnings.

 

You should keep in mind that the penalties for accessing these funds early are harsh indeed in order to discourage this practice from occurring. Take care that you do not over-invest in these funds to the point that you will need to access them in times other than dire emergencies.

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IRAs are another creature all together. You will find much stricter limitations on IRAs than on 401 (k) plans beginning with the fact that if your employer offers a 401 (k) you must make very little money in order to qualify for the tax deductions that this particular retirement fund generally allows.

 

The maximum yearly contribution for your IRA will be $4,000 or 100% of your annual income; whichever is greater up until the age of 49. Once you've reached the age of 50 you can invest an additional $1,000 to your fund.

 

The other major drawback when it comes to an IRA is the fact that you must begin receiving payments at the age of 70.5 from your account. You will also be heavily penalized if you make an early withdrawal from these funds.

 

Whether you choose a 401 (k) plan, a Traditional IRA, or both for your financial retirement investments, I hope you will take the time to discuss the benefits and disadvantages of each with your financial advisor before making your final decision.

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              Common 401(k) Mistakes

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Believe it or not there are many mistakes that can be made along the way when it comes to financial retirement savings and investing.

 

Unfortunately a good many of these mistakes center around the 401(k), which can be a tremendous boost to your retirement plans when used properly in order to build your portfolio. The problem is that the mistakes are often the only things we hear when it comes to retirement plans and investing. I suggest begin with the mistakes so that we can move along to better information and advice in the near future.

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The first and perhaps largest mistakes that people make when it comes to 401 (k) plans is not signing up. Yes you heard that right. What people do not understand is that this is something your employer offers so that you can have some security for your future. It is a manner of saving money for your future that shouldn't be overlooked or taken for granted.

 

Even a bad 401 (k) plan is better than no 401 (k) and with strict regulations those are few and far between. More importantly, if your company offers to match the funds in your 401 (k) plan not taking them up on that offer is literally tossing money in the garbage can. 

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The next big mistake when it comes to your 401 (k) is risking too little. Rewards come with risk. If you aren't taking any risks with your investment then you are by and large throwing money down the drain. In addition to that, it is nearly impossible to meet your retirement goals without taking some risks, and some hits along the way.

 

This doesn't mean you should be reckless but along the way you are going to need to take some calculated risks in order to receive the bigger payouts that most of us hope for when investing in their retirement funds.

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Risking too much. There are many risks involved when investing in the stock market. There are a few that deserve a little more mention than others. First of all, stocks present a fairly large risk, particularly to the uninitiated.

 

While it is true that great rewards are most often the product of great risks you do not want to risk the bulk of your retirement by investing it all in stocks. Another thing you want to avoid doing if at all possible is investing in your company stock. We've seen too many lives destroyed when companies go under taking the financial stability of their employees along with them.

 

Many companies offer incentives to employees for investing in their stock, which may be tempting but I recommend investing as little as possible in your company stock whenever possible as this could lead to problems down the road. 

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Finally, the worst thing you can do for the health of your 401 (k) is borrow against it. There are so many ways in which this could go wrong and the penalties for this are more than a little prohibitive.

 

They are designed to be that way so that you will use the funds for their intended purpose. If you absolutely have no other option is the only way I would recommend borrowing against your 401 (k) and I would seriously consider selling a kidney before doing that.

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When it comes to your financial retirement, 401 (k) mistakes can be far more costly than you may realize. Work to avoid these common mistakes and you should be well on your way to a successful retirement.

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