How Do I Make Sure I Have the Financial Resources to Retire?
By Tom Breedlove, Breedlove & Associates
With all the political talk about reforms to Social Security and Medicare, many American workers have begun to think about the financial aspects of retirement. Here are some of the basic things everyone should understand and act upon as early as possible (time is your greatest ally; the younger you are when you address your retirement plan, the better off you’ll be):
- Social Security provides income to American taxpayers during their retirement years. The amount of income is determined based on the recipient’s 35 highest-earning years (as reported to the Social Security Administration in the tax reporting process). This critically-important monthly check throughout your retirement years is funded by your employee FICA taxes and the matching portion paid by your employers. If you’ve been paid legally, you should receive a statement from the Social Security Administration estimating your benefit when you reach retirement age. They also have an online estimator if you have at least ten years of work experience on record.
- Medicare provides health insurance to American taxpayers during their retirement years. Since medical expenses tend to be much greater during old age, this benefit is also vital. It, too, is funded through the employee and employer portions of the FICA taxes.
- Many Americans have ambitious plans for their golden years (travel, start a business, build a beach/mountain home, etc.) and don’t want to be completely reliant on Social Security. Therefore, they choose to supplement their retirement income by investing some of their current income into retirement savings accounts. In order to encourage this kind of saving behavior, Congress has given these individual retirement accounts (“IRAs”) special tax advantages.
If you decide you want to supplement your Social Security income, here are two of the most popular types of IRAs:
Traditional IRA: Employees can contribute up to $5,000 (2011) of their pre-tax compensation per year to a Traditional IRA. Contributions are “tax-deferred,” meaning that the contributions are not subject to certain payroll and income taxes now. Instead, these accounts are taxed when the funds are withdrawn at retirement.
Roth IRA: Employees, employers or both may contribute up to $5,000 (2011) of the employee’s after-tax compensation per year to a Roth IRA. Instead of contributions being “tax-deferred” like a Traditional IRA, the Roth IRA contributions are made using after-tax (“take-home”) pay and, therefore, there are no taxes due when funds are withdrawn at retirement.
In both types of accounts, the investment is able to grow year after year unimpeded by taxes, enabling the funds to accumulate much faster than a traditional savings account.
If you haven’t already begun to plan for your retirement, we encourage you to do so as early as possible. Here’s a link to the AARP Retirement Planning Calculator which is a very simple and helpful tool. A little planning and preparation now will make your golden years much more golden.