What do you want to do when you retire? Travel? Pursue your hobbies? Volunteer? Open a small business? All of the above? You can have a wide range of retirement goals - but if your going to achieve any of them, you'll need to save and take advantage of available retirement plans.
Are you doing a good job at these tasks? Unfortunately, many of your fellow American aren't. Consider the following:
· We're not saving now - In 2004, the personal savings rate hovered around one percent, according to the Bureau of Economic Analysis. Many financial experts suggest you put away at least 10 percent of your income each year.
· We haven't saved previously - Nearly half of all workers with a retirement savings plan report that their total assets, excluding their home, amounted to less than $25,000, according to a recent survey by the Employee Benefit Research Institute.
· We're not "maxing out" on retirement plans - Only about five percent of workers contribute the maximum amount to their 401(k) or IRA, according to estimates by the U.S. Treasury Department.
Clearly, these numbers are unsettling. So, if you want to achieve a happy retirement, what should you do? For starters, identify your retirement goals - and give them a "price tag." What do you plan to do during your retirement years? Will you travel? Buy a vacation home? Open a small business? Once you identify what your retirement might look like, you should be able to calculate about how much money you'll eventually need. An investment professional can help you come up with these figures.
Next, evaluate your current savings and investment vehicles. Are you putting away as much as you possibly can? If not, what opportunities do you have? You may be able to put in more to your 401(k) or another type of tax-deferred, employer-sponsored retirement plan. If you have already "maxed out" on your 401(k), then you may be able to contribute to a traditional or Roth IRA, both of which also offer tax advantages.
If you've contributed the maximum amounts to a 401(k) and an IRA, then you may want to look at other retirement savings vehicles, such as annuities. You can contribute large amounts to an annuity, and, as is the case with a 401(k), your earnings grow on a tax-deferred basis. If you need to make a withdrawal from an annuity, any accumulated earnings are taxable at the time of the withdrawal. In addition to paying income taxes, you may also be subject to a surrender charge by the issuing insurance company. And if you are younger than 59 1/2, you may be subject to a 10 percent IRS penalty on the earnings.
You have a wide array of investment options in all these retirement plans - 401(k)s, IRAs and annuities. But the volatile stock market of the past few years may make you leery of funding your retirement plan with stocks. However, stocks historically have been the only financial asset to provide the type of growth that most people need to help achieve their long-term goals. Therefore, when you're investing for retirement, you may want to reconsider owning stocks.
But what can you do to help protect yourself from the volatility of the stock market? First, start investing early for retirement - the more time you have on your side, the better your chances of overcoming market downturns. Next, diversify the investments within your retirement plans. By spreading your dollars among a wide array of stocks - along with bonds, government securities and money market vehicles - you can help blunt the impact of volatility and give yourself more chances for success.
By taking these steps, you'll go a long way toward achieving your retirement objectives - so start taking action soon.
