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Retirement Plans
Home » Retirement » Planning Your Retirement While Young » Retirement PlansGoals: Before you can set retirement goals, it is wise to imagine the type of lifestyle you want after years of working. Ask yourself if you want to travel, do you want to have your mortgage paid off or do want to move? The answers to these are important because they will directly relate to how much money you will begin saving. No one knows how long the will live, but you can make an estimation. This estimation will help in making your goal for the amount of money you will need in retirement. Family history, personal health, the amount of exercise you receive and whether you live a healthy lifestyle all contribute to your longevity. What type of retirement account you want to open is a crucial question. The answer can affect your whole retirement picture. Opening IRA’s is one such account you can open to assist in completing a retirement portfolio.
Retirement Calculator: The Social Security Administration, AARP and financial institutions have retirement worksheets (commonly known as calculators) to assist you in determining how much money you will require for retirement. By inputting information such as years’ earning, rough estimate of inflation and other information it is possible to formulate a budget.
Inflation: Predicting inflation over the next 30 to 40 years can be difficult other than to predict there will be inflation. The inflation rate can cause considerable shrinking when anticipating how much to begin saving for retirement. If the inflation rate increases 3 percent a year and retire making $40,000 then the amount of money needed by the age of 80 will be $72,000 to maintain your standard of living. The longer you live the amount increases.
Social Security: Relying on only on Social Security for retirement is like believing in the Pot of Gold at the end of a rainbow. As of 2006, Social Security provides for approximately 40% of the income you will need upon retirement. Obviously, a frugal existence will be imminent if you only have Social Security for retirement income. Here is an example of what life could be like it you only have Social Security upon retirement. If you live very frugally, you just might be able to make it. With expenses such as medical issues (dental), drugs, homeowner and auto insurance you can expect to use at 25% of your income on these necessities. You won’t have a credit card and it will be very difficult to borrow money. These loans would be hard to every payoff. Spending money at Christmas and family birthdays could be a burden if you spent too much or had a large family. Eating out would almost be impossible and clipping grocery coupons would be high on your entertainment list. You would need to limit miscellaneous spending and it highly possible you would need to live in subsidized housing. I know you’re thinking this sure paints a grim picture of Social Security, but this is reality. You don’t want it to be your reality so planning ahead for retirement is crucial.
IRA’s: The Individual Retirement Account is a wise choice to begin saving for retirement. There are two types of IRA’s: traditional and Roth. A Traditional IRA allows you to save money for retirement tax-deferred until withdrawal. This money grows tax free and can also place you in a lower tax bracket. The Roth IRA is not tax-deferred. You pay taxes at the time you invest the money. When you withdraw the money for retirement, you don’t owe any taxes. There are income restrictions placed both the Traditional and Roth IRA. These restrictions dictate how much money you may invest each year in these accounts. The maximum contribution you can make if you are under the age of 50 is $5,000.
401(k)’s: This retirement plan is employer based. The company controls investments and the amount of money contributed to your retirement. The 401(k) has gained in popularity. However, employers base contributions on the country’s financial climate and contributions have decreased in the past few years. 401(k)’s can supplement other company pension plans and Social Security. The employer selects investment options such CD’s, mutual funds and possibly company stocks. The employee is allowed to contribute a portion of wages into the plan. The money you contribute is tax-deferred and your contribution reduces your taxable income. The money begins to earn interest immediately because taxes are not taken out immediately. If you have this option at your job, it is wise to contribute the maximum amount each year. Money can be rolled into other accounts such as an IRA if you change jobs. This money is taken out of your check before you have a chance to spend it. By starting this investment at a young age, you could possible be providing a significant portion of your post-retirement income.
Paying off the Mortgage: There are pros and cons in paying off your mortgage before retirement. If the decision has been made to pay-off the mortgage, then it is crucial to make the necessary plans each time you move during your pre-retirement years. If you finance your first home for 30 years, then it will be paid off before retirement. Our society is so mobile most of us can expect to move at least more than once. For most of us, several moves and homes will be in our future. If you purchase a new home at the age of 45, then a 15 to 20 year loan will ensure you won’t have a mortgage debt at your retirement. There is a sense of security at owning your home with no mortgage. Your home can also be one of your most important investments. Paying off your mortgage releases money for other budgetary needs. If you use your retirement nest eggs to pay off your home, there will be less money drawing interest. Another con to paying off your home is your lost tax savings. The decision to plan to pay off your mortgage is an individual decision that should be based on your financial goals and current finances.
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