That is a reoccurring question and often discussed in these times of economic uncertainty. Will social security survive? What effect does the world economy have on our future? How do I need to adjust my retirement planning strategy? These are all legitimate concerns that demand answers. There are a number of retirement plans we should investigate as we begin our journey towards retirement. Our philosophies and strategies change as we move through various phases of our life. A thirty year old man looks at life from a totally different perspective than his sixty-five year old grandfather. That said, his investments and strategies follow suit.
Retirement Plans are Changing
In years gone by, pension plans were significant benefits for employees. A company offering a solid pension plan was able to retain employees for the long haul. Quite often they were funded entirely by employers. When employees reached retirement age, the benefit kicked in. That was then. This is now. Economic conditions have caused old established company pension funds to collapse, and demands on cash flow and profits caused the cancellation of many others. Today, some companies employ 401k or 403b retirement plans, while others take advantage of credits they can earn by
instituting IRA retirement plans. The 401 k plan is a tax deferred plan offered by employers, in which employees are allowed to defer part of their pay checks and invest those proceeds in mutual funds or annuities. Earnings grow in these plans tax deferred. Employers may contribute an amount, so long as every employee is treated equally. They can also provide employees a plan that is closed to their participation. A 403 b plan works in a similar fashion, but it is intended for employees of non-profits hospitals and health care facilities, charities, churches, educational facilities and other similar institutions.
IRAs are popular and advantageous retirement plans. There are a number of different designations within the IRA family, but essentially they involve traditional IRAs and Roth IRAs. In traditional IRAs, money invested is not subject to taxes until it is withdrawn. Roth funds use after taxed money. Once the money is invested in the Roth IRA, it is allowed to grow tax free, in fact, it is never taxed, even upon withdrawal. If your employer does offer a matching fund plan to which you can invest a portion of your earnings, invest to your maximum amount allowed. Remember that how we invest now will directly impact our retirement income. Actions we take now will affect how well we can live in the future. Inaction is not an option. We should start at an early age to develop our retirement plans.
Those of us who are intelligent enough to realize how our future can be impacted by a lack of income will start saving at an early age. By combining relatively inexpensive term insurance with a simple pass book savings account at your bank or other financial institutions, we can begin the process of saving and learn to protect our interests and those of our family. It is advisable to shift those funds into higher yielding savings or investment funds. At this stage of life, our risk tolerance is higher and yields on investments better with riskier investments.
If we are fortunate enough to be employed by a company that offers its employees 401 k retirement plans, the companies will match a portion of your contributions to the retirement plan. At this age level, the choice of funds or stocks in our plans can be the riskier but offer higher yields.
As we reach our thirties and forties, our investments tend to become slightly less risky, and our retirement funds begin to reflect a balance of risk and conservative investments. Our 401Ks can be converted to IRA accounts in which we should leave a percentage of our money out for growth in higher yields instruments of investment, but balance it with solid conservative bond funds and blue chip equities. Our term insurance could be converted to whole life plans as soon as our cash flow allows. The funds within the insurance program will grow and allow you to withdraw money for specific needs while keeping our insurance alive and active.
What Stage of Retirment Planning are you in?
At this thirty to forty year age stage, consider moving retirement funds to a Roth IRA plan which allows contributions to grow, undisturbed by any taxes. The dollars you put into your Roth are taxed as they are invested but never again. Money can grow and compound and continue to grow until such time as when retirement is a reality. The fifty to sixty age is critical, as it often represents the last opportunity we have to get our retirement plans in order before we reach full retirement age. At this point, that age is sixty six, but it gradually increases over the next few years. More of your funds should be invested in solid, but less risky retirement plans. Your life insurance may be fully funded, and rather than keep up the premiums, money from your whole life policy can be paid out in a single cash distribution or converted to an annuity. Depending on your financial position you can select the best option for your needs. An annuity can be a welcome form of extra money that will help your cash flow after retirement. You might also consider keeping enough liquid money to pay for any estate taxes that might occur should you die as well as burial costs. Some elderly people pre-plan their funeral arrangements with proceeds from insurance or annuity programs.
The bottom line, when it comes to devising retirement plans is simply this. Seek professional help. Today’s financial world is extremely complicated. Without the experience and knowledge a reputable financial planner can provide, you might find yourself in financial jeopardy. Your money can be lost or poorly invested so that at the time when you most need it, your money will run out.
Talk to your financial adviser about the alternatives that make the best sense for you.