Grady Financial

retirement Planning

Don’t let someone else decide what retirement is for you. Don’t let them tell you when it’s your time to retire.

The question is not just “Am I prepared financially?” but “Am I prepared mentally for retirement?” It’s important to cast a vision of what you want retirement to be for you and then pursue it.

Ask yourself the following questions:

What parts of my current work will I miss? How can I incorporate those things into my retirement? Rather than running away from your current job or occupation, you should be running TOWARD the life that you really want. It takes time to figure out what that life looks like for you. It takes reflection while searching your heart for those vital components of your “good life”.

Let’s talk through what a retirement of contentment will look like for you.

Lifetime Income Need

There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever.  With the prospect of paying for retirement needs for as many as 30 years, retirees need to be concerned with maintaining their cost-of-living. 

Health Care Needs

Longer life spans can also translate into more health issues that arise in the process of aging.  The federal government provides a safety net in the form of Medicare, however, it may not provide the coverage needed especially in chronic illness cases.  Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today. 

Paying for Retirement

Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments.  A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Social Security as a safety net for steady income.

Social Security

Social Security was established in the 1930’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives.  The age of retirement, when the income benefit starts was, originally, age 65 which was referred to as the “normal retirement age”.  Now, for a person born after 1937, the normal retirement age is being increased gradually until it reaches age 67 for all people born in 1960 and beyond.  The amount paid in benefits is based upon the earnings of an individual while working.  If a person wanted to continue to work and delay receiving benefits, they could do so build up a larger benefit.  Conversely, early retirement benefits are available, at a reduced level, as early as age 62.

Employer-Sponsored Qualified Plans

Most employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of his earnings into an account that will accumulate until retirement.  As a qualified plan, the contributions are deductible from the employee’s current income.  The amount of income received at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon.  As in all qualified plans, withdrawals made prior to age 59 ½ may be subject to a penalty of 10% on top of ordinary taxes that are due. 

Depending on the size and type of the organization, they may offer a 401(k) Plan, a Simplified Employee Pension Plan or, in the case of a non-profit organization, a 403(b) plan.

Traditional and Roth IRAs

Individual Retirement Accounts (IRA) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favored treatment. The traditional IRA allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account.  Distributions from a traditional IRA are taxable.  A Roth IRA is different in that the contributions are not tax deductible, however, the earnings growth is not currently taxable. To qualify for tax-free and penalty-free withdrawals of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take plance after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum).  Depending on state law, Roth IRA distributions may be subject to state taxes..

Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching 59 ½ , may be subject to an additional 10% federal tax penalty.

For more information on retirement income needs and income sources, please contact us today.

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