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The truth is Americans have become some of world's biggest consumers, while lagging significantly behind most other countries when it comes to savings habits. Statistics show American's save a smaller percentage of their income than most other industrialized nation! Which is not a good combination!
Savings and investment programs can be hard to understand and confusing for many people, which is maybe why so many people 'put off' making these important decisions. Who wants to make the wrong decision about something so important? And where do you go for easy to understand accurate answers?
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| There are a lot of people that know that our Social Security system is also in trouble. On top of that, Americans are living longer lives with even more needs for Retirement Funds. Living longer doesn't necessarily mean healthier either. Conditions that can be treated today, may have caused death even just a few years ago! With longer life expectancies, the cost of pharmaceutical drugs and the cost of health care, the baby boomer generation is set up to need more Retirement Funds than any previous generation. |
 The Basics
Here are a few questions to consider before beginning a savings program:
- What strategies are best for me?
- What about safety, liquidity and flexibility?
- How should I diversify between safety and risk at my age?
- What is the best way to contribute to a plan?
- How much should I contribute to a plan?
- What if I need cash for an emergency?
All these are good questions.
The best advice in Savings and Retirement planning are some age old 'golden rules':
- First pay off any high interest debt or credit cards. For instance if you are paying 12.% interest on a $5,000 credit card balance, you are guaranteed 12.0% on your money to pay OFF the debt. There are not too many places these days where you are GUARANTEED 12.0% on your money!
- Once you have eliminated high interest debt, it is normally recommended to have at least 90 days of living expenses readily available in case of an emergency, before you begin a more long term savings plan. Otherwise you may have to withdraw the funds you are investing for an emergency. Once this is in place, you are ready to begin making more long term investments.
- Have a disciplined plan of savings - save a set amount (or percentage) of your income before you spend it! Do not have a put and take system, put today...take tomorrow!
- Start as early as possible! Time can either be your best friend or your worst enemy in 'Savings and Retirement Planning'! Action is rewarded and hesitation is costly. Therefore, 'indecision' is a 'bad decision'!
- Identify the type of investor you are - aggressive, moderate or conservative and then diversify your investments between safety, risk, industry, etc. accordingly.
- The rule of 100 - Use age 100 as a constant deducting your current age from 100 to determine the percentage of assets that should be invested conservatively and at risk. Example, if an investor is 45 years old, take 45 from 100. Therefore the investor should consider having 45% of their retirement plan assets in a safe investment without risk and 65% of investments in equity markets.
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Time is Magic - It is very difficult to play 'catch up' for the years that you do not contribute towards your savings and retirement account. These lost dollars and the growth of these dollars can never be recaptured! Therefore the real price tag for not saving in any given year gets bigger every year as the compounded growth on those dollars is lost forever!
Time is the real magic that make savings and retirement planning work! A person setting aside modest contributions at a young age can substantially outperform someone who begins making large contributions to a Retirement plan later in life! Time can beat the amount of dollars invested any day! So the trick to savings and retirement planning it is not a matter of having large amounts of surplus cash to invest with. It is a matter of making consistent systematic contributions of whatever you can afford to do and then allowing TIME to do it's magic!
Prove it to yourself, use our Savings and Retirement Planning calculators in the tool bar. Change the length of time that the funds grow (or the years before retirement) to something shorter and then longer, see the results for yourself! Also use the calculators to estimate what you might have for your retirement, based on your current retirement plan balance and estimated future contributions. Or, find out what you need to contribute in order to have your savings or retirement goals met!
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What are my savings goals?
One of the first things to think about when beginning a savings program is:
- What are my goals?
- What am I saving for?
Normally these goals are broken up into categories:
- Short term (1-3 year)
- Medium term (4-10 years)
- Long term goals(>10 years)
An example of a short term goal would be a down payment on a new vehicle. An example of a medium term goal would be saving for a down payment on a home - a Roth IRA might be a good option for this situation. Examples of more long term goals would be accumulating adequate funds for your children's college education - a Education Savings Account might be good for this goal. Or for your retirement, where a Traditional or Roth IRA might be best. You may click here for a comparison of a Traditional and Roth IRA.
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Invest with Pre-Tax Dollars First!
Whenever possible, it is generally best to use Pretax dollars when contributing to a Savings or Retirement Plan, such as a 401 (k) or 403 (b). However, these plans must be available at your place of employment. Many times your employer will also match contributions you make, up to a specified maximum. This is a home run! You get an immediate return on any dollar you invest by having your employer match some percentage of your contribution. And you also have Uncle Same and your State (if applicable) helping you make the contribution. Because if you didn't contribute to the plan, you would have to pay taxes on the earned income!
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IRA's
If you are not a participant in a 'Qualified Retirement Plan' where you work, or if you are not eligible to participate in the plan and you are a 'single taxpayer' you qualify for a full Traditional IRA deduction. If you are married and your spouse is a participant in a 'Qualified Retirement Plan' where they work. You may still qualify for a full or partial Traditional IRA deduction (see IRA contribution/deduction limits). There is also the Roth IRA to consider. Roth IRA's are not just for retirement, Roth IRA's are for Life! Visit the link above and see. Last but not least, there is the new Education Savings Accounts for accumulating Education funds for your children, grandchildren, nieces and nephews college education. Each IRA has its own unique features and considerations.
Traditional IRA retirement accounts are for individuals with W-2 income. If you have 1099 income, K-1 income or you are self-employed, you have a tremendous window of opportunity to plan for your Retirement. New tax law changes approved by congress known as the 'Economic Recovery and Tax Relief Act of 2001' (or ERTRA) ERTRA basically put self-employed people on the same playing field as big corporations, regarding Retirement plans. Self-employed individuals can even now have a 401 (k) Plan known as a Uni-K, which can provide much larger tax deductions than ever before. Also the 412 (i) Plan was introduced, which provides the largest deductible contribution possible from any Qualified Retirement Plan. The old SEP/IRA is still available, however these new plans are very attractive in comparison.
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Look for Tax-Deferral!
Once you have saved all you can (or all that is reasonable to do) on a pretax basis, then look for tax deferral! This allows you to keep more of your own hard earned money working for you! Tax-deferred annuities are a great investment! All interest and growth (which is not withdrawn) from a Deferred Annuity owned by an individual is tax deferred! Please use our power of tax-deferral calculator to see how much more money you earn and keep for yourself when your interest and growth is NOT exposed to current taxation!
Deferred Annuities offer tax-deferral, safety, asset management and many other advantages! In addition, proceeds paid at death are generally payable to the beneficiary free from Probate! This of course saves time and expense, which is prudent Estate Planning! In most cases annuities pay a higher interest rate than Bank CD's. You may select an annuity that pays a guaranteed interest rate, or links growth to major market indices such as the S&P 500. In addition the interest and growth that is not withdrawn from a deferred annuity does not count as income when calculating tax liability on your Social Security Payments!
Cash values in life insurance policies also grow tax deferred. In addition, death benefits are received by your beneficiary in most cases income tax free. So while providing the necessary life insurance protection you need, you also realize significant tax advantages on your cash value growth!
Again, the most important thing in 'Savings and Retirement Planning' is to start a 'Plan of Action' NOW and stick with it! Remember, the only thing you will have for certain tomorrow, is what you send ahead to yourself today! Call our office today or request a quote on the left toolbar for information on a program that is right for you!
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