Why Retirement Planning Is So Important
Every person has certain goals that they would like to achieve during his retirement phase. Usually, there also exists an ideology about the kind of life that the person will lead. Retirement planning is about establishing these goals and ensuring that there is sufficient income to cover the lifestyle. When looking at investments, the planner makes sure that there is a good mix of tax-deferred and tax-free income. When examining insurance, she must ensure that all of the financial assets of the individual and his family are protected.
Social Security is one means by which the government seeks to help a person save for after he stops working and distributes part of their income on a monthly basis during this phase of his life. If a worker was employed for 10 years and paid the Social Security tax during this period, he will be fully eligible. However, the amount of monthly income due depends on the wages or salary earned while working.
Rarely is Social Security income enough to cover the full needs of the individual. Therefore, he should elect to also contribute to a retirement account either through his employer or on his own. Employer-sponsored programs such as the 401(k) or 403(b) are good options from which payroll deductions may be invested. Traditional and Roth Individual Retirement Accounts (IRAs) are also available at many banking or investment institutions.
As the employer-sponsored plan and a traditional IRA typically provide tax-deferred income, whereby income taxes will be due when distributions are made from the account, income from a Roth is generally tax-free. This is because the dollars used to invest in it are after-tax dollars. Annuities can also provide tax-free income, other than capital gains. It is good to plan for a mix of both.
Although a person begins to receive Medicare after they turn 65, it is often not sufficient to cover all of their medical needs or costs. Out-of-pocket payments for this government provision can often be quite high. There are other insurance needs to address as well, such as life insurance and long-term care possibilities. The first is particularly important when a person either has young dependents or debt.
In order to avoid the estate tax, some people will need to consider gifting part of their assets away during the later stages of their life. However, this requires a sufficient amount of planning. If they gift too much over the course of those years, they will incur a gift tax which defeats the purpose.
A professional can help ensure that retirement planning is done correctly and that all of the appropriate bases are covered. The most important aspect is guaranteeing that income is available throughout the life of the retiree. However, there are also other considerations. Protection from asset depletion because of an unforeseen financial risk is also extremely important.
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