What the future has in stored for us is a question that no one can answer. However, planning ahead is definitely a good option. It is not an easy task to calculate how much one should save for retirement. Retirement planning has many factors to consider including one’s age, when one plans to retire, the income today, desired retirement lifestyle and where one should start.
Planning for the retirement years is one of the most important financial decisions. There are some different tools and strategies that can help to achieve the set goal of retiring comfortably. The foremost thing to do is to assess the amount of money that one needs to retire in a reasonably comfortable style. With respect to this, there are some major factors that one needs to consider before coming up with a retirement figure. The primary factor to be looked into is inflation, which in turn causes the purchasing power to fall. This means that the current expenditures cannot be used to calculate one’s future financial needs because goods and services will undoubtedly cost substantially more on retirement. In the United States, Social Security is only available to retired people after the age of 60. Therefore, a person retiring at 55 will have to sustain on his or her own without any government help. Another very important aspect to consider is that after retirement the savings slow down. Most of the income is used for consumption purposes. Also with the gradual increase in age, there are additional expenditures in the form of healthcare.
Taking all these situations into consideration one can opt for a suitable retirement plan. Government, employer and individually sponsored retirement plans are good means of saving up for retirement. 401k is a voluntary retirement plan offered to employees of a company that allows up to a certain percentage of their pretax pay to be set aside and invested within the retirement plan. The funds and the growth are not taxed until the funds are withdrawn. The percentage of pretax pay varies from company to company and can increase with each year of employment. However, there are certain restrictions as to when and how one can withdraw the 401k funds without penalties. Moreover, it is also the individual’s responsibility to manage the fund. The IRA is a retirement investing tool for employed individuals that allow an annual contribution of 100 percent of earned income up to a specified maximum amount. There are over 10 different varieties of IRAs, each with different tax and income benefits. The contribution may be deductible from income taxes, depending on one’s income and coverage by an employer-sponsored retirement plan.
Retirement accounts are beneficial because the government provides the option of tax deferred savings, which means that the money deposited into one’s retirement account is tax sheltered. However, the government obtains its share by collecting tax after the person retires and begins withdrawing the money. Thus, one can compare both before-tax and after-tax investment options to procure the best returns. However, if one chooses after tax investments, then it is important be disciplined within that investment, which means to avoid the lure of utilizing money in the brokerage account for personal purposes. Asset allocation is another significant area. One must decide wisely as to put the correct percentage of assets in stocks and the remainder into low risk instruments like bonds and treasuries. All planning with regard to retirement needs to be done with clear thinking. The more that you depend on your retirement savings for income, the more conservatively you should invest because asset preservation is the key.
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