Since people are living longer than ever, retirement savings need to last longer and work harder. It is more important than ever to make smart financial decisions. There are four standard sources of retirement income, Social Security, retirement plans and/or employer sponsored pensions, investment income, and earned income from part time employment.
Decide on Your Strategy
If you are starting your retirement savings early, you can afford to be aggressive and invest in riskier funds. Because you have time, if your fund loses value there will be time to recover. However, if you are closer to retirement, you will want to consider less risky fund to reduce the risk of losing value in your investments.
Types of Retirement Plans
Employer sponsored plans are called qualified plans because they qualify for special tax treatment. If your employer offers a retirement plan, start saving through this type of plan. Assets are held in a tax-sheltered retirement account. Taxes are not due on the funds until withdrawn. Types of employer-sponsored plans are 401(k), 403(b), and 457 plans.
A 401(k) plan is available to employees of private corporations. Employers may also provide matching funds, up to a certain percent of your income. The money your employer contributes to your 401(k) account it not automatically yours until you are “vested”. To be vested, you have to continue working for the company for a designated length of time. A 403(b) plan is an option for employees of nonprofit organizations and 457 plans are for employees of state and local governments and tax-exempt organizations.
Personal Retirement Accounts
An Individual Retirement Account (IR) allows you to save up to a certain amount of money in a tax-deferred plan. The annual contribution limit, set by the Federal government, is $5500 for individuals under the age of 50 and $6500 for those who turn 50 by the end of the year. The main benefit of an IRA is receiving a tax deduction for your contributions. Tax is deferred until you withdraw from your IRA account. At that time, you will likely be in a lower tax bracket, which means you will pay a lower tax rate on the withdrawn funds.
A Roth IRA is a non-deductible, after-tax account. Contributions to the account are not tax deductible, but funds grow tax-free. Withdrawals make after at 59 ½ are tax-free.
Annuities are financial contracts with an insurance company that provide a regular income at retirement. A deferred annuity allows you to contribute money now for use later. You are not allowed to withdraw this money until you reach the age of 59 ½ . When you reach retirement age, the money you have built up in your annuity will provide you regular income payments throughout your retirement.
- Retirement: Tools & Calculators – A collection of calculators and tools for retirement, including workbooks and research based resources.
- My Retirement Paycheck – Provides a wealth of information to explore your retirement decisions. Eight aspects of your life work together to make up your retirement paycheck including work, social security, home & mortgage, retirement plans, savings & investing, debt, and fraud.
- Financial Security: Financial Planning – Has several resources are available at eXtension.org which is part of the Cooperative Extension System. It provides objective and research-based information and learning opportunities that help people improve their lives.
- Department of Labor – Provides information about different types of retirement plans.
Source: Lorna Saboe-Wounded Head, South Dakota State University, iGrow