Retirement Planning

Millions of baby boomers are getting ready to retire and a large number of them have good reasons to be very nervous. Remember, social security is no longer a bullet proof system as it used to be and if congress doesn’t make some radical changes to social security system, it will go bankrupt by 2042. With the low personal saving rate in our country, there are not many options for people in retirement who don’t have a adequate nest egg.

Most people need at least 60% to 80% of their pre-retirement income to live comfortable in retirement. Now, where is this money going to come from? Social security will pay at least in near future but it is not enough and your personal savings and retirement accounts should provide this income. A good retirement planning should be able to provide 60% of your pre-retirement income without considering social security income. This article explores some of the important aspects of retirement saving and planning to help you retire rich.

What Are The Options:

Most people don’t think beyond 401(k) plans when it comes to retirement. Remember, 401(k) is an important piece of retirement puzzle but there is lot more to it. Here are some of the options that you should focus during your pre-retirement days. Also, sooner you start, better your end results would be.

401(K) Accounts: 401(k) saving accounts are most common form of retirement savings in our country. 401(k) plans are usually sponsored by employers and sometimes there is a matching contribution from employer as well. 401(k) offers flexibility investment choices, pre-tax contribution and professionally manages funds and plans. If your employer offers matching contribution, that’s an added benefits. You should always participate in a 401(k) plan even if you feel that you’re too young or don’t have enough money. This is even a more attractive option if there is a matching contribution from your employer. For example, if your employer offers 100% matching contribution up to 3% of your salary, you’re missing out on a 3% salary raise by not participating in your 401(k) plan.

IRA/Roth IRA Accounts:

IRA stands for individual retirement account. You’re eligible to put pre-tax dollars in a simple or traditional IRA account if you don’t participate in a retirement savings account such as 401(k). Also, you don’t have to have a job or income to put money in a IRA account. Sometime people would wonder how would you fund an IRA account when you don’t have a job? Primary reason for doing this is to avoid paying taxes to Uncle Sam and let your money grow tax free. One of the good example would be a stay home spouse. If your spouse doesn’t work, they can still put money away in an IRA account with your help and get the up front tax break. It will not only lower your tax liabilities as a family but also make add an additional retirement income source for your family. Roth IRA on the other hand is funded with after tax money but earnings grow tax free until you start withdrawing money in retirement. Roth IRA contributions are allowed even if you have 401(k) and/or IRA accounts.

However, Roth IRA is only available to single-filers making up to $95,000 or married couple making a combined maximum of $150,000 annually. Pension Plans: Pension plans are not as common as 401(k) plans. A pension plan is funded by employer and could provide additional boost to your retirement savings. Pension benefits are calculated with considerations to social security income. Pension benefits also offer flexibility of monthly payment until the death of the primary account holder or a higher amount for a certain period(for example 15 years) in retirement. If primary account holder dies, pension benefits are paid to the assigned beneficiary. Pension benefits plans are also known as defined benefit or DB plans and they usually have a vesting schedule. Most employers require at least 5-year service before an employee is vested.

Regular Investment Accounts Investment accounts are funded by after tax dollars and you’re responsible to manage the funds in the account. A simple brokerage account is a good example. Investment choices include stocks, options, mutual funds and ETFs. You can also invest in hedge funds if you have a minimum of $100,000 to invest. Most hedge funds have their own requirements so you need to check with specific hedge fund but $100,000 is a general guideline.

Life Insurance:

If you have a family, a life insurance policy is just common sense to have. You want to protect your loved ones in case something unfortunate happens to you and there is no better protection than a term life insurance policy. Term life policies are popular because you can buy a fairly good coverage for a small monthly premium. If you have money to spare, you can buy a whole or variable life insurance policy that invests a part of the monthly premium and builds a cash value.

Long Term Care Insurance:

Most people do require nursing home and in-home care at some point in their retirement period. This could cost you lot of money if you don’t have care insurance. A long term policy is fairly cheap to purchase if you’re in your 30s or 40s, so take a closer look at them and if you anticipate these expenses, a long term care policy might be the smarter thing to do.

Long Term/Short Term Disability Insurance:

If you become disable, you can apply for social security disability but this amount is usually not enough for most people. Long term disability is one of the option to supplement your social security income if you become disable. A long term disability insurance is a good option for most people but it is a MUST for those with higher income. You can also purchase a supplement short term disability insurance to supplement the coverage that your employer might offer free of cost.

Own a Home:

Owning a home is one of the top priorities for most people. However, very few understand its importance in retirement planning. your home is probably your biggest asset and could help you pay for your living expense in retirement. Reverse mortgage is one of the product that allows you to borrow money against your home and continue to live in it until you die. You receive monthly payments and amount and payment terms are flexible.