By Andrew Housser
Retirement planning is one of the most important financial decisions anyone can make, beyond getting out of debt. Long ago, most people did not save for retirement; in fact, retirement as we know it did not always exist. Later, many companies offered pension plans, but today those options are mostly a thing of the past.
Today, most workers must save money for their own retirement. Many employers match some portion of what employees save on their own behalf. But options can vary for workers, not to mention the self-employed. Here are some common plans, available to many people:
1) Calculate your needs.
Many financial planners estimate you'll need 70-80 percent of your annual salary for a comfortable retirement. To do your own estimate, total your anticipated expenses. Include costs for home payments and maintenance; food, clothing, utilities, transportation and other necessities; hoped-for expenditures on dining out, travel or other luxuries; and a realistic estimate of medical expenses. A financial planner can help personalize a plan to take you to retirement and beyond.
2) If you have a pension, know what it means.
Fewer workers have pensions these days (about 22 percent of all workers in 2011, down from 40 percent in 2010, according to a Society for Human Resource Management survey). Today, pensions are offered most frequently to union workers and public employees. There are two types of pension plans. A defined contribution plan means the employer places a set amount of money in a retirement account on the employee's behalf. The other type is a defined benefit plan. In this version, the employer promises a certain total amount of money to an employee upon his or her retirement. Defined benefit plan funds are insured to a certain extent by the Pension Benefit Guaranty Corporation (PBGC), a federal agency to which employers pay premiums.
3) Participate in a 401(k) plan if one is offered.
Up to 93 percent of employers offer a 401(k). Employees contribute to the 401(k) plan, and some employers match those contributions to an extent. That match money is usually tax-free income. If you don't participate, you are essentially passing up additional income, as well as making yourself poorer in your old age. By all means, contribute to your 401(k) plan if at all possible. For workers at nonprofit institutions, the 403(b) is a comparable type of plan.
4) Don't rule out -- or totally rely on -- Social Security.
Whatever becomes of the Social Security system, it is important to understand it and how it may work for you. U.S. workers automatically receive a summary of their estimated annual Social Security benefits a few months before their birthdays each year. The amount of benefits might seem low, especially when you take inflation into account. If nothing else, consider the Social Security summary a reminder to invest for your own retirement.
5) Open an Individual Retirement Account (IRA).
An IRA lets you save for your own retirement. You can open an IRA instead of or in addition to an employer retirement plan. If you contribute to a Traditional IRA, contributions are tax-deductible, but you must pay income tax on withdrawals during retirement. Contributions to a Roth IRA are not tax-deductible, but withdrawals are tax-free during retirement. For 2011, people under age 50 can contribute up to $5,000; those 50 and older can contribute up to $6,000. Those limits apply to all combined contributions to both Traditional and Roth IRAs.
6) Look into self-employed options.
If you are self-employed, you can still contribute to an IRA, but you have other options as well. Choices include an "individual" 401(k) for individuals. Businesses with fewer than 100 employees can choose a SIMPLE-IRA with a contribution-matching provision. A SEP plan is for individuals as well as a business of any size, and is funded solely by employer contributions. Keogh plans are profit-sharing plans, where the employer contributes a certain percentage of compensation to himself or herself, and employees. Regardless of the option, what is important is that you do participate. Many self-employed people throw up their hands, or rely on the idea that they will sell their business when they retire, but having a plan for retirement savings is just as important for the self-employed as anyone.
7) Save wherever you can.
Tax benefit or not, only your income and expenses limit the total amount you can save. Most people agree that they never regret saving money. Savings can be used for retirement living, medical expenses or emergencies over the years.
Planning ahead today can help you stay out of debt in the future, and provide for a happier and more peaceful retirement. It is ideal to begin saving as soon as you begin working -- but it is never too late to start.