The individual retirement account (IRA) has been a primary savings tool for retirement for more than 40 years. In fact, many employees plan to use a combination of retirement accounts for their golden years. The IRA and 401k form the base of the retirement income pyramid during your golden years. Annuities, bonds and certificates of deposit form the middle layer and stocks and social security form the top. This graphical representation of income has financial payout measured against risk. In your golden years, risk should be minimized. The fact that stocks and social security are at the top (and thusly take up less space) is because social security and stocks may represent zero income.
People under the age of 55 may not be able to reasonably expect Social Security to be available at their retirement. Retirement is a private affair and you can’t expect anyone to help you. The harsh reality is that stock income and Social Security can’t be expected to pay your bills. The pre-tax funds you put away right now should be the nest egg you will utilize during your retirement years. These are the IRA and 401K funds that you contribute to on a bi-weekly basis. Because this money is in your name and managed by your employer, it is a highly dependable source of income.
All of us should have been advised when opening a retirement savings account that as age increases risk should decrease. In the game of life, we need to judge for ourselves the likelihood of Social Security still being around when we retire. With this in mind, you should configure your contributions to maximize your employer contribution plus fifty percent. That means that if an employer will contribute $6,000 dollars to your retirement account per year, you should contribute $9,000 dollars.
Annuities should be a strong part of your retirement portfolio. Many annuities allow pre-tax contributions and they should be a strong part of your savings strategy. Calculate what your IRA payments will be and add in your annuity income. This way you can back calculate what your contribution should be. You should also do some disaster planning and estimate what happens if you outlive some of your benefits. With people living longer this scenario is happening more and more each year. When you take out a sheet of paper and write down what all these monthly payments will be, you get a picture of what your standard of living will be like. You can also estimate the cost of living in the future. Finally you can compare what you think your needs will be when you are 65. Whether you plan to own and maintain a house or use some other form of shelter is up to you. But each of these costs must be weighed. The end result of these calculations is a projected lifestyle. If you are bringing in more than $1000 more than your bills, then your retirement lifestyle will provide discretionary income. If your projected income is less than your projected bills, you will never be able to retire. This sad but unfortunate reality has become apparent to millions of Americans since the Great Recession began. Take some time to reassess your retirement and IRA contributions. You will be glad you did.
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