It is never to early nor never to late to think about setting up a retirement account. If you have not yet made up your mind about which investment options you wish to pursue you likely need help figuring out what your options are. When you retire you will want to maintain a steady income and Social Security income will not suffice sadly. Now that we know that social security is just a supplement to our incomes we need to figure out what investment options we have. In order to best decide what investments to make we need to figure out a few other things first.
The number one question we need to ask ourselves when planing retirement is what kind of life do we wish to live in retirement? The rule of the thumb is that you’ll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses. So if your annual expenses are $30,000.00 and your social security Income is just $10,000 you will need to account for $20,000 per year in additional expenses. There for you may need an additional $400,000 in total for retirement. A general rule of the thumb to go by says to replace 70% of your income when you are retired, but if you plan to really live it up when you are retired you may need to plan for more such as replacing 80% of your income in retirement. This is all assuming that you have paid off your mortgage by retirement age, if this is not the case you will need to account for the mortgage payment on top of everything else.
One way to save for retirement is an IRA or individual retirement account. This is a special tax sheltered form of retirement savings. IRAs can be complicated as there are three types of IRAs, each one having its own advantages, Traditional, Roth, and Rollover. A traditional IRA you put money into the account and the taxes are deferred until you withdraw it in retirement. Because many people in retirement are now in a new lower tax bracket these accounts may do well for many. Roth IRAs on the other hand are funded with after tax dollars and withdrawals on these accounts are tax free provided that certain conditions are met. A Rollover IRAs on the other hand are where you take money from another retirement plan such as a 401k and roll it over to the IRA.
A 401k on the other hand is also on a tax deferred basis, where you are taxed only when you withdraw the money at retirement. For most people a 401k plan is through their workplace, where their employer matches a certain percentage towards the retirement fund. You can also borrow against your 401k Prior to retirement so it serves as an emergency pool of funds, but great care should be taken to avoid withdrawing from this type of fund. There are also 403(b) or 457 plans which are very similar with some minor differences.
Even if you have a 401k Plan you should also invest on your own into an IRA, preferably with a Roth IRA, so you have one income that is pretaxed and one which is not. It is also good to diversify your income streams in retirement. With smart planning you can reach your retirement goals.
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