Planning for Retirement
How to Save For Retirement
You’d be wise to consider putting money into several savings and investment vehicles to maximize your return and to ensure you’ll be able to live comfortably during your retirement. Several plans offer you the benefit of tax deferral, which means that you don’t pay taxes on the interest or capital gains until you withdraw the money.
Here are some of the most popular retirement saving options:
Individual Retirement Accounts (IRA’s)
IRAs were established by the federal government to encourage people to save for retirement. Some people can contribute a maximum of $2,000 total per year into one or more investment vehicles, such as stocks, bonds, mutual funds, annuities or certificates of deposit (CDs), on a tax-deferred basis. IRA earnings are tax-deferred. Ordinary income taxes are generally due upon withdrawal. Withdrawals prior to age 59 ½ may also be subject to a 10 percent tax penalty. Withdrawals must begin by age 70 ½, or the individual faces additional penalties.
401(k) plans are one of the best retirement savings opportunities available. Although set up by the company you work for, you typically choose how much to contribute (subject to IRS limitations) and in which of several options the money is invested. You also get the option of moving those funds to other investments at set times.
Your current taxable income is reduced by the amount you contribute to this plan, so your current tax burden is reduced. And, your employer may contribute matching funds as a percentage of your investment.
Similar to the 401(k) plan, the 403(b) plan is a tax-deferred retirement program that can only be established for employees of public education systems, hospitals and other eligible, nonprofit organizations. Withdrawals before age 59 1/2 are more restricted than with other retirement programs.
Keogh plans are tax-deferred retirement savings for people who are self-employed. Usually, 25 percent of your net income, with a maximum of $30,000 per year, can be contributed on a tax-deferred basis. Keogh plans are, however, more complicated to implement. Be sure to get tax advice from a financial advisor before you set up the plan.
Unlike most of the previously mentioned savings and investment vehicles, contributions to annuities are usually made on an after-tax basis, so they will not reduce your current taxable income. However, annuity earnings are tax-deferred for individuals so they warrant consideration when planning for retirement.
Deferred annuities allow you to accumulate money for retirement on a tax-deferred basis. You put money in, and over time it earns interest or generates investment gains or losses. “Deferred” refers to the postponement of steady payments to you. These payments will start later, usually at retirement. With deferred annuities, taxes on interest and/or earnings also are postponed until you begin receiving payments.
Source: Adapted from MetLife
What about risk?
All investments involve some risk. If, for example, you put your money into a vehicle that guarantees a certain return, you run the risk of not making a substantially larger amount of money if other financial vehicles start taking off. On the other hand, if you invest in only the stock market and it starts falling right before you need the money, you could lose resources you were depending on.