The Importance of Retirement Planning
The Importance of Retirement Planning
Retirement planning, from a fiscal perspective, generally refers to the arrangement of income or savings for the future. The primary objective of retirement planning is to attain financial independence before the age of 65.
A good retirement planning program will involve identifying all sources of income that can be converted into savings and/or investment; developing an investment plan; setting and sticking to a retirement date; and creating a list of assets and liabilities to be covered during the early years of retirement. Some programs also provide for the development of investments in stock and bonds.
Retirement planning can be broadly classified into two primary categories: Individual and institutional. Individual retirement plans are those designed for the individual; institutional retirement plans are those designed for the employer or the government. Individual retirement plans typically include an annuity, a 401(k) account, or a retirement savings account. In order to maximize the expected return on investments in these plans, it is often necessary to have some form of a tax deferred account such as a self-directed IRA or a Roth IRA. However, the tax deferral feature of a traditional IRAs cannot be used to build a portfolio of stocks, bonds, real estate, and other investment items.
Retirement plans designed for the employer typically involve an employee-based retirement plan, or IRA. A self-directed IRA can be used to build the portfolio of the employer. An employer may also have plans designed specifically for employees. Typically, employer-sponsored retirement plans provide a pre-tax retirement amount that is tax deferred. These funds are invested in safe and liquid CDs.
Retirement plans designed for the government generally require contributions to a retirement trust, also referred to as a retirement account. In some cases, the government requires a portion of one’s annual salary to be deducted as tax deferred income. In these cases, the funds accumulated in the retirement account are invested in an insurance company or mutual fund with the proceeds being distributed to beneficiaries in the form of periodic payments.
Some governments also provide Social Security benefits, while others provide retirement benefits to members of a certain religious sect. Some retirement benefits are available to military personnel or retired members of the armed forces.
Retirement planning programs, by and large, are not subject to taxation. Most retirement planners do not advise their clients to change their personal financial status, such as using Roth IRAs, to help their retirement planning efforts. This is because, as a practical matter, most of the money contributed to a retirement account stays in the account and does not accrue until it is needed to purchase retirement income-producing items, such as a home or vehicles, or retirements and health care insurance.
It is common for most of us to spend a great deal of time and effort planning our retirement benefits in the early years of our lives. In fact, we are often more focused on getting the cash now than we are about saving for our eventual retirements.
Retirement plans can become complicated, especially when there are several persons involved in the planning process. As stated above, the tax deferral feature of most IRAs cannot be used to invest in the stock market. For this reason, retirement planning must occur over a period of time, sometimes even several decades. For example, the Internal Revenue Service has stated that it will not permit a single person to obtain a retirement benefit tax deferral for a minimum of ten years, even though a family may receive retirement benefits at the same time.
A qualified custodian, who is an authorized representative of an IRA custodian, usually handles the paperwork associated with retirement plans. The custodians also handle the distribution and payment of annuities, and the like-kind exchange (commonly referred to as IRA conversions. between IRAs.
Retirement planning should not only involve retirement benefits but also include investments and retirement tax planning. In order to avoid incurring taxes in future years, it is important to establish an IRA custodian who is knowledgeable about current economic conditions and can provide sound advice about tax law and the proper way to invest for future retirement. A qualified custodian is one who is experienced in planning IRAs and can provide an individualized investment program based on an individual’s financial needs. For example, a single person may require specific account balances and specific financial goals.
Investing in stocks or bonds may offer high yields in today’s economy, but in the future, the yields could be substantially lower than the present market values. A custodian will discuss investment opportunities with you and help determine which options are appropriate for you. In addition, a custodian also helps plan your estate planning in case of death.