Saturday, February 07, 2015

Retirement Planning Terms You Should Know

Important Aspects of Retirement Planning
Planning for retirement can be complex, overwhelming and scary. Most people avoid discussing retirement and hope that they have enough saved without doing an assessment and working with a financial advisor to set retirement goals. The best way to save for retirement depends on individuals' financial situation, comfort level and proper guidance. Retirement planning will help cover all of your monthly bills and expenses and a few wants during your retirement years so you don’t have to go to back to work if you don’t want to. Unfortunately, According to a study by Bankrate one third of Americans have nothing saved for retirement.
Retiring at the right time is as important as saving for retirement. Choosing the right time to retire can save you thousands of dollars. Location is just as important when planning for retirement. Where you will live, the lifestyle you want to have, your monthly expenses, cost of living, health care costs, and what age you want to retire and keep components of develop retirement goals.

Retirement Planning Terms You Should Know
  1. Asset Allocation – a strategy that spreads investments over a variety of asset categories, such as equities, cash, bonds, etc. The method you allocate your assets depends on a number of factors, including your risk tolerance and your desired rate of return. Proper asset allocation can help you manage risk and volatility.
  2. Catch-up - If you are 50 or older you can make contributions to your IRA or employer-sponsored retirement plan above the normal contribution limit. This is designed to help pre-retirees make up any retirement savings shortfall by increasing the amount that can be saved prior to retirement. The amount that can be contributed depends on the retirement plan and the year you make the contribution.
  3. Distribution - a withdrawal of money from a retirement savings account, if you take money out before age 59½ you will have to pay penalties and/or taxes on the money depending on the retirement plan.
  4. Diversify/diversification - a risk management technique that allocates funds to a variety of investments within a portfolio. Investing in different kinds of investments will yield higher returns and present a lower risk.  Re-allocate investments to at least three different areas to minimize losses. Allocations do not have to be equal distributions, 33%, 33%, 33%, mix and match distributions.
  5. IRA (Individual Retirement Account) - retirement accounts with tax advantages. There are two types of IRAs, a traditional IRA which is tax deferred and provides a tax deduction, and a Roth IRA which is tax-free.  Your investment grows tax-free in an IRA until you begin making withdrawals, usually after age 59½. If you take money out before age 59½ you will have to pay penalties and taxes on the money.

Why You Need to Know These Terms
Understanding these terms can be crucial to your future. The lack of understanding of basic retirement planning terms can cause miscommunication or cause you to make bad financial decisions that could derail your retirement goals.  It’s like taking your car to a mechanic for repairs - your car is fixed but you can’t use it (drive it) because you don’t know how to count money to pay for it.

An experienced financial adviser should explain retirement planning terms to clients.  However, if you have not selected a financial adviser yet or do not understand the terms used by your financial advisor – you may feel like a deer in headlights.  Grasping these terms will help you to make sound decisions regarding your retirement and help you become an educated consumer.

How to Plan for Retirement
  1. Start early. Start saving for retirement with your first job. If you get your first job at 16 start planning for retirement then. Save as much as you can while you are single or don’t have any children.  It is much more difficult to save for retirement when a life change occurs such as children, unemployment, purchasing a home, planning for college, etc. Contribute at least 10% each month towards your retirement. Contribute more when you are able to do so.
  2. Start with your company's 401K. Do research to see what plan has the best options to help you achieve your retirement goals.
  3. Diversify. Control your risks by investing in various mutual funds that are a combination or low, medium and high risk to limit your losses.
  4. Compound interest. The sooner you start saving for retirement, the more money you will be able to save due to compound interest. This allows you to earn money on the money you already invested.
  5. Know how much. Once you start saving for retirement, you need to set retirement goals.  You will need at least 70 – 80% of your income during retirement. To reach this you will need to save for at least 25 to 30 years or 20 - 30 times you current salary depending on your salary and monthly expenses.  You should adjust your contributions with each salary increase or increase contributions on a yearly basis.
  6. Postpone.  Postpone retirement as long as possible or do a phased retirement by working fewer hours and gradually retire.
  7. Downsize. Scale back expenses at least 3 to 5 years prior to your retirement date to reduce spending by 30% - 50%.  Trade in a luxury car for a cheaper model or move to a smaller home. Buy more needs vs. wants.  Delay large purchases until you save enough to cover the cost.
  8. Life. Consider where you want to live, what lifestyle you want to have, your health condition, cost of living, and other expenses during retirement and plan for those items. Know what your yearly income will be when you retire.
  9. Insure. Ensure you have adequate insurance coverage such as life, health, dental, home, auto, fire, flood, disability, long-term care, homeowners or renters’ or business insurance. Insurance is a form of protection against loss, harm, damage or theft and saves you money in the future.  Insurance should provide enough to reimburse for loss or damages. Review policies yearly and make adjustments as necessary. Keep beneficiaries up-to-date.
  10. Delay Benefits. Delay social security or other benefits.  Draw your social security benefit or other benefits at full retirement age to get the maximum amount you are entitled to receive.
  11. Focus on long term growth. You have to be willing to leave your money untouched for at least 5 to 10 years. Otherwise you won't be able to see the benefits of your money growing.

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