When you are young and just starting a professional life, retirement might be the last thing on your mind. However, if you ask any retired person, or someone entering retirement, what advice they would give you about planning for that day, chances are they’ll say: Start as soon as you can!
WHY RETIREMENT SAVINGS ACCOUNTS ARE IMPORTANT
The best way to assure you have a comfortable retirement, is to select a retirement savings account/s that matches your retirement objectives – and start saving as much and as frequently as you can! Without such accounts to help you, or with the wrong type of savings accounts, you’ll likely find it extremely hard to meet your retirement savings goals.
WHAT WE CAN DO FOR YOU
As you start planning to save for retirement, you’ll likely have many questions that you need answered:
- When should I start saving?
- How much should I save?
- How much will I need for a “comfortable” retirement?
- What’s the best vehicle for me to save for my golden years?
- Which “pot” of retirement savings should I tap into first?
Our Retirement Savings specialists will help address all of your questions. We’ll also help you make informed decisions about which types of savings vehicles are right to meet your particular retirement goals. Not all retirement savings accounts are designed the same. For instance, some have yearly maximum contribution limits, and others have planned distribution criteria associated with them. Violation of those rules can lead to IRS-imposed premature withdrawal penalties.
Our Retirement Savings Account specialists will help you navigate the plethora of saving options available to you, some of which include:
- Individual Retirement Account (IRA): This is the most commonly used savings account available to most Americans saving for their retirement. Where a company-sponsored retirement plan isn’t available, IRAs can be used as a way for tax-deferred savings. Over the period while you work, tax-deductible “contributions”, up to an eligible amount, can be made into the account. You only pay taxes when you withdraw funds in retirement
- Roth IRA Account: Roth IRAs differ somewhat from traditional IRAs – which allows for tax-deferred growth of retirement savings - in that the money deposited into these accounts is from “after-tax” dollars. Subsequently, when you make withdrawals from your Roth account, you are not taxed. Additionally, your savings within the account also grow tax-free
- Simplified Employee Pension (SEP) IRA: Some employees may have access to employer-sponsored SEP-IRA accounts. These are similar to traditional IRAs, and may sometimes use Annuities as a retirement savings vehicle
- Savings Incentive Match Plan for Employees (SIMPLE) IRA: This is yet another retirement saving plan available to working Americans saving for their retirement. SIMPLE-IRA plans mandate an employer-matched contribution, and are ideal for smaller business (less than 100 employees)
- Traditional 401(k) or Roth 401(k) plans: Like individual and Roth IRAs, employers can offer staff traditional 401(k) plans or Roth 401(k) plans to their employees. In some cases, for instance where an employer matches 100% of your contribution to these retirement savings accounts, it might make sense to join the plan. However, the funds are invested at the discretion of the fund manager, and you (the employee) might have no say in those decisions. We’ll help you decide whether you should participate or opt out of these plans
- Value-added services: We’ll not only help you choose the right retirement savings accounts for you, but we’ll ensure they are the most cost-effective and tax-advantaged for your particular situation. If you switch jobs, we’ll also advise you on whether it makes sense to Rollover, Stay, Move or Cash out from an employer-sponsored retirement savings plan
Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 20 years, retirees need to be concerned with maintaining their cost-of-living.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Medicare, however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today.
Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with settlement costs and sizable death taxes which could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.
Social Security was established in the 1930’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives. The age of retirement, when the income benefit starts was, originally, age 65 which was referred to as the “normal retirement age”. Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond. The amount paid in benefits is based upon the earnings of an individual while working. If a person wanted to continue to work and delay receiving benefits, they could do so build up a larger benefit. Conversely, early retirement benefits are available, at a reduced level, as early as age 62.
Employer-Sponsored Qualified Plans
Most employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of his earnings into an account that will accumulate until retirement. As a qualified plan, the contributions are deductible from the employee’s current income. The amount of income received at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon. As in all qualified plans, withdrawals made prior to age 59 ½ may be subject to a penalty of 10% on top of ordinary taxes that are due.
Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan or, in the case of a non-profit organization, a 403(b) plan.
Traditional and Roth IRAs
Individual Retirement Accounts (IRA) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment. The traditional IRA allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account. Distributions from a traditional IRA are taxable. A Roth IRA is different in that the contributions are not tax deductible, however, the earnings growth is not currently taxable. To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take plane after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes..
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59 ½ , may be subject to an additional 10% federal tax penalty.
For more information on retirement income needs and income sources, please contact us today.