5 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.

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.

5 Retirement Planning Terms Everyone 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 - 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

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.