 Looking Forward to Retirement
With a Good Retirement Plan
Start Planning Today
What will retirement hold for you? Foreign travel, golf, fishing, and long walks on the beach? Or will you spend your golden retirement years trying to live off a skimpy Social Security check? Now is the time to make plans for a successful retirement.
The question isn't at what age I want to retire, it's at what income. ~George Foreman
 The Four Fast Steps
Here are the four steps to a golden retirement plan. - Step 1. Choose your investment plan, a 401(k), Roth or conventional IRA plan.
- Step 2. Decide how you want to invest your retirement savings. The usual choices are stocks, bonds, certificates of deposit, mutual funds or stock index funds.
- Step 3. Choose a financial institution. Tell them you want to set up a Roth or an IRA account.
- Step 4. Mail your first contribution check along with the completed application.
Don't simply retire from something; have something to retire to. ~Harry Emerson Fosdick
Social Security
You will definitely need more than Social Security to support you during retirement. Every time you get a paycheck you contribute to Social Security. The amount that is deducted from your pay is listed as FICA on the stub. Every payday your employer also contributes an equal amount to Social Security for you. But Social Security is on shaky grounds. You can’t count on it to take care of you.
The Miracle of Compound Interest
Time is on your side if you start early to save for retirement. The miracle of compound interest has plenty of time to work in your behalf. It happens like this. If you save $1,000 and invest it at 10% interest, at the end of the first year, you’ll have $1,100. Not very impressive, huh? After the second year, your $1,000 grows to $1,210, because your interest also earns more interest. In 10 years your $1,000 will grow to $2,593.74. That’s more interesting. But after 30 years, your $1,000 will reach $17,449.40, without any work on your part. That is the miracle of compound interest. Even though it’s hard to scrape up $1,000, to invest it and to leave it untouched for 30 years, the numbers can be very motivating. Imagine what marvelous things will happen if you save $1,000 every year.
Retire from work, but not from life. ~M.K. Soni
Three Retirement Plans
“What’s next?” you ask. The government encourages you to save for retirement by offering several tax breaks. These tax breaks are called a 401(k) plan, an IRA plan and a Roth IRA plan.
What is a 401(k) Retirement Plan?
A 401(k) is a retirement plan offered through your employer. If you work for a non-profit organization, it’s called a 403(b). The plans are named after sections in the federal tax code. When your 401(k) contribution is deducted from your paycheck, there is no income tax due on the money. The rest of your pay is taxed as usual, but not your 401(k) contribution. So, if you are in the 15% tax bracket, you’re saving 15% on the contributed money. And many employers will make a matching contribution to your 401(k) savings. That’s another bonus.
“Then what’s the catch?” you ask. What you put in your 401(k) belongs to you, now and always, even if you change jobs. What the employer contributes becomes yours after a period of time, maybe after 5 years or 10 years at the company. That is called “vesting.” After age 59½ when you withdraw money from your plan, you have to pay income tax on it, because, after all, you didn’t paid any tax on the money or the interest before this.
If your employer matches your 401(k) contribution, take full advantage of it. If your employer doesn’t match your contribution, then avoid the 401(k) plan.
What Is a Roth IRA Retirement Plan?
If your employer doesn’t match your contribution to the company 401(k), the Roth IRA plan is your next best retirement strategy. You personally set up the Roth account and add money to it. There is no income tax benefit when you make your contributions. But there is a huge tax incentive; you won’t pay income tax on any of the money you withdraw in retirement. Your Roth account earns money tax-free for you!
You can start your Roth IRA with as little as $500, and you can make contributions whenever you are able. However, there is a limit on how much you can contribute to your Roth every year. In 2007 the limit is $4,000 and in 2008 the limit is $5,000. If you are 50 years old, or older, your contribution limits are $5,000 and $6,000, respectively.
After age 59½, you can withdraw the money tax-free. Before retirement age, you can withdraw the amount of your contributions without paying income tax or a tax penalty. But there is tax and a penalty on the interest you withdraw before reaching retirement age.
What Is a Conventional IRA Plan?
The conventional IRA is another plan for retirement savings that offers an income tax incentive, too. You set up your own plan, and you get a tax credit every year for the amount of the contribution you make to the plan. The money in the plan always belongs to you. However, the money you withdraw in retirement after age 59½ is subject to income tax, at whatever tax rate is in effect then. If you take the money out before retirement age of 59½, there is generally a 10% tax penalty to pay, unless you qualify for an exception to the penalty.
Financial analysts agree that the Roth IRA plan offers more tax benefits than the conventional IRA for almost everyone.
How to set up a Roth IRA
You can open a Roth IRA account at many financial institutions, but your best choice is to contact a no-load mutual fund company, or a discount brokerage. Reliable companies include Vanguard, T. Rowe Price, Fidelity, and Scottrade. Call or go online and ask for an application. You always have the option of moving your Roth IRA money to other investments later. You can also move your Roth IRA account to another institution from time to time. This is called a rollover.
To summarize your financial retirement plan, put as much in the 401(k) plan at work as your employer will match. Put the maximum in your Roth plan every year if you can. And if you can save even more, do so, even though you get no income tax benefit.
My wish is that your life brings you much success. I hope you have a very happy day.
-----Surfer Sam
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