Start Retirement Planning Now
Financial advisors, financial journalists and other professionals are all telling us it's never too early to start planning for your retirement, but lots of them are leaving out some of the gory details that are truly frightening.
Reporting from the last few years indicates that most Americans are not putting enough away for retirement; this March 2013 Forbes article puts estimates of the average retiring worker's 401k as low as a dire $25,000, and even much more than this is less than what finance experts recommend for those who expect to live comfortably in retirement.
Yes, there has been looting of public pension plans, and workers have lost retirement savings in recent market crashes, but lack of sufficient planning is also a factor.
So what's the big deal? Well, with healthcare costs exploding, and college tuition going through the roof, it's possible for these kinds of mega-expenses to eat through most of your IRA, 401k, and even the value of your house, that last resort for the average family&and that's BEFORE you retire!
Important Reasons for Starting Now
One reason that experts recommend doing retirement planning early is that there's more to cover. Many Americans are retiring at a consistent age, as life expectancy increases.Without the right kinds of savings, those years can seem to stretch out as you near retirement.
Another big reason is that retirement accounts like 401(k)s and IRAs offer younger workers the ability to defer taxes on current income. That means when you invest a big chunk of money each year, with the right financial vehicle, you can write off this capital for a lower annual income tax. Many of these accounts get taxed when the retiree takes money out, and since most Americans have a much lower tax bracket at retirement, they can generally see tax savings this way.
Lastly, there's the principle of compounded interest. The idea is that money that is put away, for example, in retirement accounts, earns cumulative interest over consecutive years that allows it to grow. Start with a small amount of money, say, $500. Assuming an annual rate of 5% interest, that money would earn $25 the first year for total of $525, and the second year, it would earn $26.25 for a total of $551.25. Within fifteen years, the money will have doubled. The earlier you start the better off you will be. See more details with this online compounded interest calculator at Invest.gov.
So Why Are People Waiting?
For some of us, retirement planning is abstract. It seems like a long way away, while a lot of other things fight for our daily attention. With so many more pressing financial issues, such as monthly bills, we tend to put off long-term planning for too long.
Some also pass on early retirement planning because of instability. The growing national debt, and volatile action in Washington and on Wall Street scare us, and make us cautious about making financial decisions, especially long-term ones. But that's just the opposite of what we should do-these things mean big trouble for those who don't store up their own nest egg against future volatility!
Retirement Investment Choices
Workers who don't have publicly provided pensions can set up traditional IRA accounts, or they can invest in carefully crafted annuities that gain interest and pay out later. Self-employed individuals can create their own brokerage IRAs. Those whose companies offer a 401(k)can benefit from matching funds and carry these investments with them if they change jobs. All of these options are generally better than underfunding your retirement, or allowing existing investments to lapse, where early withdrawals incur penalties and high taxes. Here's some input from Abilene, TX retiree Jo Rake, who was interviewed last May by KTXS 12. Here, Rake lays out the real reasons you'll want to start putting dollars into your 401k or independent account when you're young, rather than later, when it may be too late.
Other Kinds of Investment
In addition to retirement planning, Americans get many of the same kind of benefits from doing other financial planning early in life. This applies to college education planning, where taking advantage of specially set up financial instruments can help parents afford tuition for their kids. It also applies to estate planning, where some simple precautions can help avoid a situation where lawyers or others bleed money out of a deceased person's assets. Insurance and tax planning are other areas where some preliminary planning can have a very positive effect on a person's net worth and financial future.
Don't wait for the future to fix itself: take a look NOW at what you can do to secure your own financial solvency down the road.
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