Fundamentals of Retirement Planning
A financially secure retirement is a primary financial goal for most people. In order to achieve that goal, it takes planning and steady saving.
Generally, people have one or a combination of four sources of income when they retire:
- Employer Retirement Plans
- Individual Retirement Accounts (IRAs)
- Other Personal Savings
- Social Security
Most large companies and many small and medium companies provide a retirement plan as part of their overall employee benefits program. 401(k) plans have become more popular and relatively common. With this type of plan, employees contribute a portion of their wages to the plan (reducing their taxable income) and their employer usually matches some portion of what the employees contribute. In other words, the company helps fund your retirement and you get a tax break. Earnings on money within the plan are not subject to tax until they are withdrawn and employees can usually choose from a number of choices for how their funds are invested.
Individual Retirement Accounts (IRAs)
Anyone with earned income can contribute to an IRA to supplement other retirement savings. Both regular IRAs and Roth IRAs provide tax deferred accumulation of funds within the accounts. Contributions to a regular IRA may be deductible if you do not participate in an employer sponsored retirement plan or if your income does not exceed certain levels. Roth IRA contributions can be made by individuals with income below certain levels. Contributions to Roth IRAs are not tax deductible, but Roth IRAs provide an additional benefit because distributions not subject to income tax and there is more distribution flexibility. In addition, individuals ages 50 and over can make additional annual contributions.
Other Personal Savings
Another source of retirement income is other personal savings. Accumulations in savings accounts and investment accounts, while not enjoying the tax preferences of 401(k) plans and IRAs, are still a major component of most individuals' retirement income. Saving more and earning more on these funds can add greatly to your retirement lifestyle.
Social Security Retirement Benefits
The Social Security system has played a major part in Americans' retirement planning for decades. The current examination and debate over the future of the system will probably produce some changes for future retirees. Here are some basic facts about the Social Security System:
- Full Retirement Age - the age when you can start receiving "full" benefits is gradually moving from 65 to 67.
- Early Retirement Age - at age 62, you can start receiving a reduced retirement benefit.
- Average Retirement Benefits for retired couples for 2007 - $1,713.
- Maximum Retirement Benefit for retired workers at full retirement age for 2007 - $2,116.