Retirement
Retirement — for most Americans the word evokes powerful, and
contradictory, reactions. Advertisements portray retirement in glowing,
golden terms reminiscent of our favorite children’s stories — the ones
that all end with the words “and they lived happily ever after.” And
that’s certainly the hope — retirement as a worry-free crowning chapter
of life, a chance, finally, to enjoy the life for
which you’ve dreamed
(without having to pack up at the end of the week and head back home).
Increasingly, though, Americans worry that a retirement of happily ever
after looks less and less likely. Instead of eager anticipation, for
many Americans the word retirement brings a sinking feeling in the pit
of the stomach, along with vague mental promises to “get serious”
“pretty soon” about retirement planning.
That’s understandable. After all, the entire landscape of retirement
planning changed during the last decade or two and yet — in the midst
of the demands of family and career — who really had time to notice?
The result is an uneasy sense that someone changed the rules, maybe
even the game itself, and forgot to tell us — kind of like some bad
dream in which you start a cross-country family vacation with gas
priced at $2.89 and a few days later discover, “horrors”,
gas costing
$4.25 instead. (Oh, sorry, that wasn’t a dream after all.)
So what changed? And, more importantly, how does one adapt wisely to
retirement’s new realities? First, the good news: retirement is more
expensive, in part, because we are living longer, in fact, quite a bit
longer. In the “good old days” retirement savings often needed to cover
a period of 10-15 years. Now it’s more often a period of 20, or even
30, years. (Maybe these are the good old days.)
But there is some bad news as well. Fewer and fewer companies provide
traditional pension plans and, for those that do, the benefits are
shrinking. Instead, for the majority of Americans with a retirement
plan, they, not their employers, are primarily responsible for
contributions. Many other Americans are not covered by any retirement
plan at work, or are self-employed, putting on their own shoulders all
responsibility for retirement savings and investment choices.
And then there’s a second reason for concern: the long-term viability
of Social Security seems less and less assured. Even if the program
survives intact for several more decades, the level of benefits will
clearly fall well short of the retirement needs of most Americans.
Instead, a comfortable retirement will require a combination of Social
Security, pensions, personal savings and investments. In short, the
responsibility for planning, and paying, for retirement has shifted
squarely onto your own shoulders.
So, to help you start, or fine-tune,
your retirement planning process, we’ve provided information on the
primary retirement vehicles for most Americans:
Note that if you have changed employers, you can easily “rollover” prior 401(k) funds into a similar program with your new employer or, even better, into an IRA account.
• If you don’t have a suitable 401(k) program, or you would like to invest additional money, plan to open a Traditional IRA or a Roth IRA account, if eligible.
The primary difference between these programs has to do with taxes. With a traditional IRA your contributions are tax-deferred, meaning your taxable income is reduced by the amount of your contribution. You will, however, pay income taxes when you eventually make withdrawals (though your tax bracket may be considerably lower at that time). A Roth IRA works just the opposite: you pay income taxes on the funds you contribute, but then pay no taxes on withdrawals. As a result, expectations about your likely retirement tax bracket may determine which type of IRA will prove most beneficial.
To compare and check requirements for each plan, see our comparison chart.
Note that 401(k) plans, as well as both types of IRA’s, impose
contribution limits — meaning you may well need additional retirement
savings beyond the maximum amounts available through these plans. In
that case, plan to fund an additional retirement savings/investment
account(s) with “after–tax” contributions.
In addition to a retirement savings plan, you may also want to save
towards the college education costs of your children. Otherwise, those
costs may sabotage your retirement savings. For tax-advantaged college
savings, we recommend opening a Coverdell
Education Savings Account.
Eventide offers Traditional
IRA, Roth IRA
and Coverdell
(College
Education) accounts.