If you are young, retirement planning is the last thing on your mind. You probably find it difficult to see beyond 40. If you are old, however, retirement has suddenly become the next step. You may be worrying about how much longer you will be able to work, not only because of physical reasons, but emotional ones as well. You have worked your entire life and feel very deserving of a break, but how will you afford it? This scenario is why, despite the difficulties involved, people need to start planning sooner for retirement. If you do not have the funds to support yourself and possibly your family by the time you reach 60 or so, you could be facing serious hardship. Investing in an IRA or annuity is an effective way to save up for that day when you can finally tell your slave driver boss to take this job he is asking you to do and shove it.
Perhaps you do not have access to a company-sponsored retirement plan, or just want to put some extra dough away on your own. IRAs, or Individual Retirement Arrangements, are investments that you do not have to pay income taxes on until you start withdrawing money from them (typically at age 70). You must have earned income in order to put money towards a traditional IRA, must be younger than the age of 70 years and six months to make contributions towards it. You can contribute a maximum of $3,000 per year towards your IRA, regardless of your present income. Another benefit of a traditional IRA is that your contributions may be tax-deductible depending on your income.
As far as retirement funds are concerned, company-based plans will give you a choice between taking the money in one lump sum or as an annuity, a monthly income payment that lasts basically for the rest of your life. Typically, lump sums are placed in an IRA account so you can avoid owing taxes on the transfer, and so the money can build tax-free until it is withdrawn. With this comes a great responsibility. You do not want to withdraw too much too quickly, especially early into retirement. Many people end up living longer than they had expected, or encountering more expenses than they had foreseen, particularly medical expenses.
Taking an annuity, rather than the lump sum, relieves you of budgeting issues. Having a fixed income is generally safer and less of a hassle. However, be aware that inflation rates can deprive you of the monthly payment’s value. If your employer OKs it, try to do both, by using some of your retirement savings to receive monthly retirement payments, while taking the rest out in a lump sum to invest on your own. Devise an investing strategy; place your money into an IRA and then determine just how much you would like to place in investments and how much to place into an annuity, which can be bought from a number of insurers. Make sure your employer is giving you a fair rate, and then decide on what type of payout plan you would like to buy. A fixed payout represents a steady income despite the effects of inflation, whereas a variable payout can keep your payments a step ahead of inflation, but may go up or down depending on the inflation rate. Do not make this decision hastily, since it is an important one. Do your research and talk to advisors, friends, and relatives to determine which type of retirement plan best suits you.
By Kelley Caner