Future Outcome: Planning Now for Retirement |
By Alexander Carl on July 9, 2010
.jpg.aspx?width=75&height=75) If you’re starting a career or building a family, retirement seems like a distant destination that’s scarcely imaginable. Isn’t that something “old folks” worry about? When there’s so much to be accomplished now, retirement gets shoved to the back burner.
For many people, the “back burner” means saving too little or not saving at all. But no matter how much you ignore it, there will still come a time when you’ll no longer generate income from employment.
So, you must ask yourself: how do you foresee living? Forget those images of rest homes and Florida golf communities; this is your lifestyle. How much does it cost for you to live this year? If you don’t plan on dramatically downsizing your expenditures, multiply that amount by 25. That is about how much your retirement will cost.
I hope you see why you should be saving. The big question: how do you get there?
Perhaps you have been already squirreling away your funds, and hopefully you’ve done it in a way that gives decent returns. That’s all well and good, but there are two major obstacles to retirement savings: taxes and inflation. Any savings plan must have a way of countering them.
While we often think of the Internal Revenue Service as a bully, they provide three popular savings plans that work as retirement solutions:
401(k). This provision of the tax code allows for a special savings account, deferring its taxes until withdrawal. You choose to divert work income into the account, and from there the money can be invested in a variety of venues.
Traditional IRA. A worker creates an IRA within a bank or brokerage, making investments that are not subject to tax. Contributions to an IRA are tax-deductible. Like the 401(k), tax must be paid at withdrawal.
Roth IRA. Its contributions are not tax-deductible, but the Roth IRA is tax-free at withdrawal.
A common retirement savings mistake is not taking enough risk in investments. Taking risks early on gives you the flexibility to create growth, rather than sticking everything in a savings account.
And don’t forget about company pensions and Social Security.
Basically: save now, freedom later.
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