Somewhere along the road to retirement, you will need to be sure you’ve taken advantage of all possible sources to "fill up" your retirement income "tank." You don’t want to exhaust your financial resources before the end of your journey. Yet, the truth of the matter is that many people don’t save enough for retirement. However, the more you accumulate now, before retirement, the less you will need to worry about working after you retire to maintain your lifestyle. Consider this route to "top off" your retirement income:
Determine your retirement needs and resources. With people living longer than ever before, a sound retirement strategy may need to provide an income stream, indexed for inflation, that can last anywhere from thirty to forty years. Even with a four percent annualized rate of inflation, the cost of goods and services will triple in about twenty-nine years. With this in mind, compare the amount of income you receive now with the amount you will have during retirement.
Once you’ve established this information, you’ll need to develop sufficient financial resources to provide you with the needed income stream. What assets do you currently have? What savings plans do you have in place? As you review your retirement program, how will you fill any gaps between what you have saved to date and your retirement needs?
Don’t count on Social Security and your pension alone. In the past, Social Security and a company pension have provided significant sources of retirement income. However, the days of "living off" a pension or Social Security have passed. If you depend on Social Security or your pension alone, you may find your income is insufficient to meet your retirement needs.
Increase your personal savings. One way to start filling the gap between your expected income and your needs is to increase your savings. Consider adjusting your budget to reallocate cash toward a savings program that is suitable for you.
Take advantage of your company plan. If your employer sponsors a retirement program, consider contributing the maximum amount. This can help you take advantage of pre-tax contributions and accumulations on a tax-deferred basis. In addition, many employers match employee contributions—usually up to a maximum percentage. For example, suppose you contribute ten percent of your income to your 401(k) plan and your employer matches 50 percent of your contribution. Thus, for every dollar you contribute, your employer adds fifty cents. Consequently, your account receives 50 percent more money than you actually contributed. This narrows the gap even further.
Use personal tax-advantaged alternatives. Individual Retirement Accounts (IRAs) allow you to save on a tax-deferred basis. In addition, permanent life insurance policies and annuities may also provide tax-deferred opportunities.
Put Yourself in the Driver’s Seat
Retirement may seem a long way off, especially if you have immediate and pressing financial concerns. However, many people in their prime earning years neglect to build adequate savings. The sooner you start taking advantage of all your retirement income opportunities, the better off you are likely to be when retirement day dawns. Why not take a few moments to review your retirement strategy? If you begin fueling up on all potential sources of retirement income now, you’ll be in the best position to secure a comfortable financial future.
The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opinions, or recommendations of the Financial Planning Association, its affiliates or members. CFP™ and CERTIFIED FINANCIAL PLANNER™ are federally registered service marks of the Certified Financial Planner Board of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor.
Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice, and you are encouraged to seek specific advice from your personal tax or legal counsel.