Pursuing Your Retirement

Starting to save earlier rather than later can make all the difference in when you retire and the amount of resources you have to enjoy in your retirement.  Much of that is due the discipline of making ongoing contributions and compounding interest.  Compounding interest can be thought of as “interest on interest”, and over time will help that original investment grow greater than simple interest or interest that is not reinvested.    According to the table below shows how Courtney has the most to enjoy in retirement because she started early and kept adding for a long period of time; she didn’t even choose to increase her contribution at some point which really would have added to her balance.  It is also interesting to compare Ashley and Michael.  Michael contributed more than twice as much as Ashley but she ended with a greater balance due to starting early and having her money compound over a longer time period.

 

Ashley

Courtney

Michael

Starts at age 21

Starts at age 21

Starts at age 35

Stops at age 35

Stops at age 67

Stops at age 67

Contributes for 14 years

Contributes for 46 years

Contributes for 32 years

$57.69 per week

$57.69 per week

$57.69 per week

7% Hypothetical growth rate

7% Hypothetical growth rate

7% Hypothetical growth rate

Total Contributions = $42,000

Total Contributions = $138,000

Total Contributions = $96,000

At Age 67

At Age 67

At Age 67

$610,374

$952,682

$342,306

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

 

Your best starting place is probably your employer’s retirement plan, especially if they offer to match your contribution with funds they deposit to your account.  If you are not participating in the plan, it is extremely rare for an employer to make a contribution for you.  It is a good idea to start with a small amount, that way you can get a feel for how your paycheck is affected by your contribution.  You are more likely to stick with the savings plan if you can get accustomed to an amount coming out of your income.  Add a little more to your contribution every year, especially if you have received a raise in pay from your employer.

The following is a general overview of the account types available for saving for retirement; Placer Summit Financial Group's advisors can help you understand which account types may be appropriate for you:

Employer Sponsored Retirement Plans - in traditional plans employees save and invest a piece of their paycheck before taxes are taken out.  Your paycheck is reduced by the amount you contribute, so the income you report to the Federal and state governments is also reduced.  Income taxes are not paid until money is withdrawn from the account; all other things being equal, this means a tax deferred employer sponsored retirement plan account should have a much larger balance at the time of retirement than a taxable account that has had income and capital gains taxed annually.  An employer may or may not match your contribution as a percentage of your compensation. Employees typically control how their money is invested in accounts they direct, however in some retirement plans employers prefer to control the investment strategy in an account where all employees pool their contributions. Typically you can withdraw your money penalty free after age 59 1/2, but exceptions such as death and disability apply. The IRS mandates contribution limits for retirement accounts, which usually change yearly to account for inflation. Roth accounts allow for employees to save a piece of their paycheck after taxes are taken out.   Unlike traditional plans, your taxable income is not reduced by the amount you contribute to the Roth account.  A Roth is also unlike a traditional retirement plan because no income tax is paid when money is withdrawn from the account after age 59 1/2.   After years of growth, Roths could be a tremendous source of tax free income for you in your retirement years.  Typical Employer sponsored retirement plans include 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs. There are a number of different plans available that Placer Summit Financial Group's advisors can discuss further with you.

Individual Retirement Accounts ("IRAs") - traditional IRAs allow income earners and their spouses to save for retirement. Subject to IRS income limits and your participation in an employer sponsored retirement plan, you may be able to deduct the amount of your contribution from your taxable income. Taxes on earnings are deferred until withdrawals are made, typically after age 59 1/2. If your income is too high, you may still make a non-deductible contribution, which means you do not reduce your taxable income with a contribution, but you can still enjoy tax deferred growth on the account's earnings. Roth IRAs allow for contributions that are not tax deductible, but grow tax free as long as qualified distributions are made, typically after 59 1/2 and at least five years after the Roth IRA is initially opened. Income limits apply to who can contribute to Roth IRAs. If you have inherited an IRA, special rules apply that dictate when and how much you must take out of the account. Placer Summit Financial Group's Advisors can help you understand the rules that apply to your IRA. Individual Retirement Accounts are titled to an individual typically as a Traditional or Contributory IRA, a Roth IRA or a Rollover IRA.

The Roth IRA offers tax deferral on any earnings in the account.  Future tax laws can change at any time and may impact the benefits of Roth IRAs.  Their tax treatment may change.  Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 1/2 may result ina  10% IRS penalty tax in addition to current income tax.

Deferred Annuities - are contracts with insurance companies in which you can invest funds that either earn a fixed rate of interest or a variable rate of return on a tax deferred basis. Income taxes are owed on earnings when money is withdrawn, typically in retirement. "Annuitization" or entering into a second contract with an insurance company to receive a guaranteed income for life is optional; simply withdrawing funds is another option. Some insurance companies have adopted features that, during an account holder’s life, guarantee a minimum income or withdrawal amount from the annuity; guaranteed minimum death benefits which are designed to increase the amount an account holder's heirs receive have also been adopted by some insurers. Deferred annuities are typically held by an individual or individuals jointly, and occasionally are held in an Individual Retirement Account or "IRA".

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.  Guarantees are based on the claims paying ability of the issuing company.  Withdrawals made prior to age 59 1/2 are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.  Riders are additional guarantee options that are available to an annuity or life insurance contact holder.  While some riders are part of an existing contract, others may carry additional fees, charges and restrictions, and the policy holder should review their conract carefully before purchasing.

Taxable Accounts - while there are no tax benefits for saving for retirement this way, you maintain absolute control over your assets, can invest them any way you wish, and can access them at any time without age restriction or the potential for a tax penalty for making a withdrawal. Taxable accounts are typically held in your individual name, jointly with another person, or in a Living Trust.

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