A secure, comfortable retirement is everyone’s dream. However, planning for retirement now can be tricky as we are living longer, healthier lives. While spending more time in retirement is a blessing, finding sources of retirement income is more important than ever. Preparation and education is the key to getting it right. Most retirees derive their retirement income from three primary sources: Social Security retirement benefits, qualified retirement plans, and individual savings/investments.
Social Security Retirement Benefits
Social Security retirement benefits are intended to provide only a portion of an individual’s retirement income. While Social Security was never intended to be the sole source of income in retirement, it does makeup a significant portion for millions of retirees nationwide.
Traditionally, normal retirement age with full benefits began at age 65. For those born after 1937, the normal retirement age will increase gradually, until it reaches age 67 for those born in 1960 and later. A reduced benefit is available, beginning at age 62. The monthly benefit amount is based on an individual’s past earnings record. A worker can earn a larger retirement benefit by continuing to work past normal retirement age. Retirement benefits are subject to adjustment for inflation on an annual basis.
Qualified Retirement Plans
A retirement plan is considered to be “qualified” if it meets certain requirements set by federal income tax law. In general, employer or employee contributions to a qualified plan are currently deductible and the earnings are tax deferred until paid out of the plan. Mandatory distribution rules typically apply and taxable withdrawals before age 59½ may be subject to an additional 10% penalty tax.
· Employer-sponsored qualified plans: Defined contribution plans, such as 401(k), 403(b) or SEP plans, typically put a percentage of current salaries into the plan each year. The retirement benefit will depend on the amount contributed, the investment return and the number of years until a participant retires. The investment risk rests on the participant. Benefits are generally taxable.
· Individual qualified plans: Include the traditional Individual Retirement Account (IRA) and the Roth IRA. Contributions to a traditional IRA may be deductible and earnings grow tax deferred. Distributions from a traditional IRA are taxable to the extent of deductible contributions and growth. Contributions to a Roth IRA are never deductible and earnings grow tax deferred. If certain requirements are met, retirement distributions from a Roth IRA are tax free.
· Non-qualified retirement plans: An employer may set up a plan, often in the form of a deferred compensation plan, which does not meet federal requirements to be considered “qualified.” Benefits are generally taxable when received. Such plans are often used as a supplement to qualified retirement plans.
Individual savings and investments are the third primary source of retirement income. An individual can choose to accumulate funds using a wide range of investment vehicles. The appropriate type of investment will depend on a number of factors such as an individual’s investment skill and experience, risk tolerance, tax bracket, and the number of years until retirement. Below are listed some of the more commonly used choices.
· Savings accounts: Including regular savings accounts, money market funds and certificates of deposit (CDs) at banks, savings and loans and credit unions.
· Common stock: May also include other forms of equity ownership such as preferred stock or?convertible bonds. Stock can be owned directly, in a personal portfolio or indirectly through a mutual fund.
· Bonds: Includes corporate, government or municipal bonds. Bonds can be owned directly, in a personal portfolio or indirectly, through either a mutual fund or unit investment trust.
· Real estate: Individually owned investment real estate or indirect investment through a real estate investment trust or limited partnership.
· Precious metals: Such as gold or silver, in the form of coins, bullion or in the common stock of mining companies.
· Commercial deferred annuities: Commercial, deferred annuities are purchased from a life insurance company and can provide tax-deferred growth through a variety of investment choices.
Other Income Sources?
• Continued employment: On either a full or part-time basis. Wage and salary income is usually taxable and before-normal-retirement-age. Earnings above a certain level may affect the amount of Social Security retirement benefits received.?
• Home equity: If a home is completely paid for, a reverse mortgage may provide additional income, without giving up home ownership.
The appropriate type of investment will depend on a number of factors such as an individual’s investment skill and experience, risk tolerance, tax bracket, and the number of years until retirement. No matter what you choose, one thing is certain – The sooner you start saving, the more time your money has to grow. Make saving for retirement a priority. Devise a plan and stick to it.
This information is for educational purposes and should not be considered specific financial, tax or legal advice. Always consult with a qualified advisor regarding your individual circumstances. Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser.
Brad Zucker, RFC® is the president of Safe Money Advisors, Inc., a Las Vegas-based independent financial advisory firm. He blogs on personal finance every Monday for the RJ. For more information visit www.SafeMoneyAdvisorsNV.com or connect with him via Facebook and LinkedIn.