Why Retirement Planning Matters

Personal Finance
Why Retirement Planning Matters

Why Retirement Planning Matters

Exploring 401(k)s, IRAs, and More

Random Retirement Facts

Did you know?

Planning for retirement is essential because it ensures financial security and peace of mind during your golden years. According to a 2023 study by the Employee Benefit Research Institute, nearly 40% of Americans fear they won’t have enough money to retire comfortably.

Retirement & It's Importance

Investing in retirement accounts like 401(k)s, Individual Retirement Account (IRAs), or other pension plans as early as possible can significantly impact the total savings accumulated by the time you retire. The Social Security Administration’s (SSA) annual trustees’ report projects that the Social Security trust funds will run out of money by 2035. Essentially, this forecast indicates that unless changes are made to the system, beneficiaries will not have anything to rely on. This situation puts an extreme emphasis on planning ahead. One must consider the potential upside of early financial preparation.

Diversifying your investments within various stock accounts is a great way to play it safe whilst maintaining the growth needed for retirement. It’s important to understand that different types of investments come with varying levels of risk and potential return. It’s highly recommended to seek out a Individual Retirement Account (IRA) on your own accord, on top of having an employer matched 401(k).

What is a 401(k)

A 401(k) plan is a tax-advantaged retirement savings plan sponsored by an employer. It allows workers to save and invest a portion of their paycheck before taxes are taken out. The funds in a 401(k) can grow tax-free until they are withdrawn, typically after the saver reaches retirement age. Named after the section of the U.S. Internal Revenue Code that established it, the 401(k) has become one of the most popular types of employer-sponsored retirement plans in the United States.

One of the key advantages of a 401(k) plan is the potential for employer matching contributions. Many employers offer to match a portion of the employee’s contributions, which can significantly boost the amount saved for retirement. . For example, an employer might match 50% of the employee’s contributions up to a certain percentage of their salary. This match is essentially “free money” and can greatly enhance the growth of the fund.

What is a Individual Retirement Account (IRA)

Individual Retirement Account (IRA) is a type of retirement savings account that allows individuals to make pre-tax contributions, reducing their taxable income for the year those contributions are made. The money invested in a traditional IRA grows tax-deferred, meaning taxes on capital gains, dividends, and interest are not paid until the funds are withdrawn, typically during retirement. At that point, withdrawals are taxed at the individual’s current income tax rate.

Traditional IRAs allow for a wide range of investment options including stocks, bonds, and mutual funds, providing flexibility and the ability to diversify investments. What you invest in will ultimately be your decision. You can realistically grow your account much faster than with a 401(k) employer-sponsored plan due to the freedom of self management. It is highly recommended that you research prior to making any investments.

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a special retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free. Unlike traditional IRAs, where contributions are tax-deductible and withdrawals are taxed, Roth IRA contributions are made with after-tax dollars. The benefit of a Roth IRA is that since taxes are paid on the front end, all growth and subsequent withdrawals during retirement are tax-free, provided certain conditions are met.

Roth IRAs provide more lenient rules for accessing your contributions. Since you’ve already paid taxes on the money you contribute, you can withdraw those contributions (but not the earnings) at any time without penalty or taxes.

What is Social Security?

Social Security is a federal program in the United States established in 1935 as part of the New Deal under President Franklin D. Roosevelt. Its primary purpose was to provide financial assistance to the elderly, a demographic severely affected by the Great Depression. Over the years, the program has expanded to include not only retirement benefits but also disability income, benefits for the families of retired, disabled, or deceased workers, and health insurance through Medicare. Social Security is funded through payroll taxes paid by workers and their employers, known as the Federal Insurance Contributions Act (FICA) tax.

“Social Security provides retirement income for almost every American worker. ” – taken directly from ssa.gov. Although it acts as a bottom layer safety net, generally social security is not enough to fully cover all expenses in retirement. However, like previously stated, one of the major issues facing Social Security is the projected depletion of its trust funds. The Census Bureau projects that by 2035, there will be 78 million people aged 65 and older. There just won’t enough money to go around.

Additional Investment Avenues

In addition to traditional retirement accounts like 401(k)s, IRAs, and Roth IRAs, it’s essential to consider other investment avenues that can contribute to your well-rounded retirement strategy. Real estate, for example, will more than likely appreciate over time. If you own a rental property, that additional income can assist with your very own retirement goals. We also understand that in today’s economy, real estate and property isn’t a easy thing to obtain. However, it still remains an important topic of conversation as we set our lifetime goals.

It’s also recommended to start investing early. By building a portfolio early in your career, you take advantage of the power of compounding, where the returns on your investments generate their own earnings over time. To get ahead, we have to plan ahead.

Frequently Asked Questions

Frequently Asked Questions: Retirement Planning

The main difference between a traditional IRA and a Roth IRA is the tax treatment. Contributions to a traditional IRA are tax-deductible, but withdrawals in retirement are taxed as income. In contrast, Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.

Social Security is a federal program that provides financial assistance to retirees, disabled individuals, and survivors of deceased workers. It is funded through payroll taxes and is designed to replace a portion of a worker's pre-retirement income. The amount you receive is based on your average earnings over your working lifetime.

Yes, investing in real estate can be a valuable component of your retirement plan. Real estate investments can provide rental income and the potential for property value appreciation over time. This can diversify your portfolio and offer a hedge against market volatility.