An Overview of Retirement Planning

Retirement, the time of life when a person can take it easy and avoid the nine to five grind. As a generation of baby boomers near retirement age more and more Americans are asking themselves if they are really ready for retirement, and what they can do to plan their retirement years to make them more enjoyable and less worrisome.

When planning for retirement the goal is to have more money available to you every month than it takes you to live on, at the very least. And if you are planning an active retirement, with more recreation and perhaps travel, then the more funds you have available the better. The tools you have available now to help you reach that goal later are vast.

Social Security – yes Virginia, there will be a social security check when you are old enough to retire. Despite some of the talk concerning Social Security reform, Social Security is a fact of American life and it will be there to help. However, Social Security was never designed to be a sole support instrument for a retiree. You need to supplement it in other ways.

Pension or retirement plan at work. If you are a government or railroad employee, a teacher, or a member of a profession or trade that has a pension plan, figure in how much you’ll have per month as a part of your retirement portfolio.

401(K) or equivalent plan from your employer. The 401K) is the most common of these plans but there are other, similar plans set up for nonprofits and other types of corporations. What most of these have in common is that the employee sets aside a percentage of income, tax deferred until retirement, and a percentage of that income is matched by the employer. For instance, let’s say a maximum of $500 can be set aside per month, and the employer will match ten cents on the dollar, or ten percent. That means the $500 you put in is worth $550 because your employer matches your contribution with $50.

Individual Retirement Account or IRA. There are two major types of IRA’s. Traditional and Roth. In the traditional IRA up to $2,000 per year can be contributed per individual, with some provisions for higher amounts. This money is tax deferred, meaning you don’t pay taxes on the money, or on the money it earns until you withdraw it from the account upon retirement. The idea here is that you will be in a lower tax bracket when you retire, and the money will have had many years to earn interest and multiply itself. In a Roth IRA you contribute after tax money, money you’ve already paid taxes on, into the IRA, but that money and the money it earns is never taxed again as long as you don’t withdraw it until retirement. If you take a calculator to the two systems you’ll see very quickly that the Roth IRA is the better deal.

Simplified Employee Pension or SEP. This is a very simple version of the 401(K) available for the self-employed and very small businesses. There are variations, for instance the Simple IRA. Consult a tax professional about which will work best for you if you are self employed. The important thing about ret4rement planning is to plan now in order to be ready later.