Many of us dream of the days we will be able to retire, travel, and enjoy doing some of the things we don't have the time to do now. However, without a solid retirement plan in place, retirement can also bring fear of "Will we have enough money to pay our bills, and to do things we enjoy?"
The answer to this question lies in your hands, and it is an answer that doesn't need to wait. No matter your age, if you are working, you should be setting money aside for retirement!
Once you have decided you are ready to financially plan for retirement, you should first decide how much money you will need when retirement arrives. Because life expectancy is increasing, and early retirements are encouraged, you will need more money set aside than what your parents needed. You should also consider that inflation will likely average about 3% per year. Once you have generated a minimum lump sum that is your target, then you can begin planning.
What investment plans are available?
Your company may offer a 401(k) or a 403(b), depending on the type of company you work for, private or non-profit. In these types of funds, the employee generally does most of the funding and the decision making about how those funds are invested. Many companies will match employee contributions, and many of the plans are mobile - in other words, if you change jobs, you can take your retirement savings with you.
Other types of traditional pension plans are not necessarily portable and you must become vested to receive any benefits. However, most traditional pension plans are safer and provide a monthly retirement check, no matter how the stock market is doing. Other plans, such as IRAs, 457 plans, SEPs, and Keoghs also offer benefits. There are definitely pros and cons for any plan - you just have to decide which plan is best for you.
For IRAs, the maximum annual contribution will rise to $5,000 by 2008. For those over 50, the limits are higher - $6,000 in 2008. There are tax advantages for traditional, Roth and nondeductible IRAs, but they vary with each. Consult a tax professional to see which might be the best option for you.
Should I take risks?
As you plan your retirement, you should look at your current age to judge the amount of risk you are willing to take while investing your retirement money. A recent article in Money magazine suggested that 20-30 year olds should consider putting 80% of their retirement portfolio in stocks. As you get older, you should gradually transfer money into lower risk investments. As your retirement approaches, you will be assured your money is safe, and what you have worked for will be there when you need it.
All retirement plans have limits and rollover policies. Know your plan well, and don't be caught off-guard. You are responsible for the way you handle money now, so that when the time comes to retire, you will be able to do the things you love to do!
Denise Craig, Chief Financial Officer
