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Are You Sacrificing Your Retirement?

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Many of us don't realize that we're sacrificing retirement. Indeed, we are often unaware that some of the choices we make now can have far-reaching consequences that can put retirement at risk. Whether you are trying to create an income stream that can help you with your retirement expenses, or whether you have a target number for your nest egg, you need to watch out for behaviors that can sacrifice your long-term prosperity during your retirement years.

Raiding Your Retirement Account

One of the most obvious ways that you might be sacrificing your retirement is by raiding your fund. Tax-advantaged IRAs and 401ks sit there, beckoning, full of cash. You might tell yourself that you will replace the money, since you are only getting a loan, but many people don't actually put the money back.

If you don't put the money back, you end up paying penalties and taxes. Even if you do actually “pay yourself back,” the fact of the matter is that you have removed some of your capital from the account. You miss out on earnings that you could have had if your retirement account hadn't been missing funds for those months.

Saving Less Than You Should

Another way you might be sacrificing your retirement is by saving less than you should. Sure, it is important to enjoy yourself now. But without planning your spending, you might find that you have frittered away your tomorrow for things that you regret getting today. Do what you can to save as much as possible in retirement accounts. If you set aside $300 a month for 20 years, and earned 6% interest, the Money Chimp compound interest calculator says that you would have $141,335.96. Put $200 more in a month, you end up with $235,559.93. That's a pretty substantial difference.

Consider, too, what you could be missing out on if you aren't maxing out your tax-advantaged retirement accounts before you open a brokerage account. You will lose money to the government if you aren't fully using the savings resources available to you.

It is also possible to sacrifice your retirement when you don't think about what you could be doing to diversify your income. If you have maxed out your retirement accounts, it is possible to begin investing your money in a way that can build up other income streams. Invest in dividend paying stocks, consider investing in yourself by starting a business, or look for some other way to use your money to make more money.

Inflation: The Hidden Enemy

You might be sacrificing your retirement by not paying attention to inflation. Inflation erodes your purchasing power. $1 million in 20 years won't buy you as much as $1 million does today. Just think about what you could get with $1 even 10 years ago. You'd be hard-pressed to get that same value today. When planning for retirement, it is important to take into account the ravages of inflation.

Make sure that you factor inflation into your plans; you might end up meeting your target, but the money might not last as long since you will need more of it to meet your lifestyle requirements. Consider diversifying to include a mix of investments that can help you offset the effects of inflation.

What other ways might you be sacrificing your retirement?

When A Roth IRA Will Cost You

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One of the big reasons (aside from the tax advantages) that so many personal finance writers like the Roth IRA is due to the fact it is possible to withdraw money early from the account without penalty. It is true that you have to meet certain conditions in order to make a penalty-free withdrawal, but the option is still there. The temptation to withdraw from a Roth to fund a college education or put a down payment on a house is tempting, so it is important to make sure you are meeting the Roth IRA withdrawal rules. Otherwise, your Roth IRA could cost you.

Early Withdrawal Fees and Penalties

The age at which you can begin making withdrawals is 59.5. If you withdraw from your Roth IRA before them, without meeting one of the exceptions, it is going to cost you a 10% early withdrawal penalty. On top of that, you will have to pay taxes on your earnings if your withdrawal is non-qualified. This amount will be taxed at your income rate. Finally, your plan holder/manager might impose its own fee for early withdrawals. All of that starts to add up.

Of course, it is worth noting that you can withdraw your own contributions to your Roth IRA at any time. Withdrawing your original contributions is usually not a problem — unless your original contribution is part of a conversion from a Traditional IRA to a Roth IRA.

Roth IRA Conversions

One of the popular retirement planning moves lately has been converting to a Roth from a Traditional IRA. Last year, anyone could convert. That policy has been extended, and it is possible to continue converting a Traditional IRA to a Roth IRA. However, it is important to note that converting to a Roth IRA will cost you. Since Traditional IRA contributions are made before taxes, you will have to pay taxes on the conversion amount. Those who made the conversion in 2010 can spread out their tax payments over two years, but those making conversions starting in tax year 2011 will have to pay taxes the year of the conversion. The cost of taxes is an important consideration when deciding whether or not to convert.

Five-Year Rule

It is also important to remember the five-year rule when considering the Roth IRA. If you don't follow this rule, you could find yourself paying penalties for taking unqualified, early distributions. You are not to take distributions from the earnings (your original contribution is another matter) in your Roth IRA account until five years have passed. The good news is that the five years starts on January 1 of the year of your first Roth IRA contribution, so periodic contributions made later don't start the clock over again.

If you convert, though, each conversion you make has its own five-year requirement. You have to have the assets sitting in the Roth IRA for five years, or until you turn 59.5 (whichever happens first). If you are older than 59.5 when you make the conversion from a Traditional IRA to a Roth IRA, you can access your original contribution at any time. The earnings, though, have to wait five years — or you are subject to a penalty.

Before withdrawing money from a Roth IRA, it is a good idea to consult with a tax professional or financial planning professional to get a better of idea of how you can avoid the costs related to a Roth IRA.

Have you ever made a withdrawal from your Roth IRA,and did you follow all the rules?

Early Savers Eyeing The Roth IRA

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Saving money is popular once again.  While many consumers never veered from the path of sound money management, quite a few got lost along the way in the past few decades.  Prior to credit cards, most of our grandparents and ancestors before that focused on saving money to prepare for any type of financial emergency. Somewhere along the line, saving became less of a priority and for some households eventually faded from financial planning altogether.

Today, more and more young people entering the workforce want to avoid the financial hardships they have seen their family and friends experience in recent years.  A renewed interest in savings has been noticed and many of these early savers are paying close attention to the Roth IRA.  Here we look at some of the benefits early savers can expect when opening a Roth IRA.

Savings And Investment Vehicle

No one will argue that the Roth IRA, like most other retirement plans is geared toward long term savings for retirement.  This makes Roth IRAs ideal for young savers.  Unlike most other savings plans, the Roth IRA allows some flexibility in when funds may be withdrawn.  This means young savers who may want to tap into their retirement fund to buy a home or pay for additional education later in life, may be able to do so without risking hefty penalties associated with other accounts.  This is made possible by the way in which Roth IRA contributions are taxed.

Unlike traditional IRAs or 401k accounts, contributions to the Roth IRA are taxed in the year in which the contribution was made.  While this takes away from the immediate tax benefit, this allows for account owners to withdrawal contributions at any time without fear of penalty or taxation.  Earning from the account must be qualified to avoid penalties, however access to contributions makes this type of account ideal for young savers who may find themselves in a position where getting their hands on the money before retirement is necessary.  In addition to the flexible nature of the account, early savers will benefit by the long term growth potential when savings remain in the account until retirement.

Smart Retirement Planning

It is important for young investors to become familiar with all of the retirement accounts available to them.  The Roth IRA offers considerable benefits, even beyond that of the tax benefits noted previously.  If you qualify for other savings plans, it is important to compare each option and learn which will be better for your own financial situation.  For some savers, the Roth IRA will be the way to go.  Others may benefit more by taking advantage of employer matches or military savings plans.  The key to maximizing your savings is to understand how each plan works to include the advantages and drawbacks associated with each.  In some cases, savers can contribute to more than one account, thereby taking advantage of multiple savings plans to maximize their savings.

Trisha Wagner is a writer for RothIRA.com, a site which strives to educate it's readers on the pros and cons of Roth IRA products.

How Much Of My Annual Pay Should I Be Saving For Retirement?

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Over the past few weeks I've been noticing quite a few searches coming to this site with people putting together their financial strategy for the new year, and asking one important question. How much annual pay should I be saving for retirement? It seems like a lot of folks are just unsure about how much they should be saving, and they're worried that they won't have enough, especially given the current economic climate, and debts they may be trying to pay off first.

Today I thought I'd do an examination of this question, and talk about what some of the different thinking on the topic is.

How Much Should I Save For Retirement?

There are several viewpoints that people can come from when trying to figure out how much to save for retirement.  Their calculations all seem to take into account different assumptions and criteria, so it's important to look at them all, and figure out which you think would work best for your situation.

Some of the criteria that may be important when calculating how much you'll need include how long you expect to live, the costs of health care in the future, how much inflation we'll see and what type of lifestyle you're living.  Also important are your age, your current income, how much you've already saved, your employment prospects in the future and how much you're willing to sacrifice now for future security.

With that said, here are some differing viewpoints on how to determine what you should be saving for retirement.

Save A Set Percentage.  Save 10-20% For Retirement

Most retirement calculators will use people's current pre-retirement income as a frame of  reference when calculating how much the person should save for retirement.  A lot of financial planners will say that most people will need anywhere from 70-100% of their income in retirement in order to be able to live a similar lifestyle when they retire.   To do that most of them will suggest that people save anywhere from 10-20% of their income.  While I think that it can be  a decent rule of thumb to save that much, in some cases it may not be adequate – or in some it may lead to saving more than you need.

Save As Much As You Can

Another viewpoint that I've seen quite often are the folks that just say to save as much as you can.  Some months that may mean saving just a little, other months it may mean up to 1/2 or 3/4 of their income.  Basically they feel that there is no such thing as “too much savings”.    They feel that if they can just save as much as possible  every month, they'll be fine when it comes to retire.   While this may serve some folks well, it may be a bit too simplistic for a lot of people.  It may lead to saving more than you need, requiring more sacrifice than is necessary.   It could also lead to saving too little if  the “saving as much as you can” is only a little bit of money at the end of the month after all other bills and even entertainment costs are paid.

Save What You'll Need

Some people believe that saving for retirement is an extremely personal thing, and you should really put together a personalized retirement package based on your own expectations and personal situation.  For example, they'll factor in things like their current income and age, amount of money the have already saved, their employment outlook,  how long they expect to live when they retire, and what type of lifestyle they'd like to live in retirement.  They also factor in things that may be changing when they retire like downsized housing costs, reduced auto expenses, and increased travel and entertainment expenses.   In other words they take a comprehensive look at what their current situation is, what they hope to do in retirement, and then they make a plan based off of what their ideal situation would be, and how much they will need.

Retirement Planning Is Very Personal

I think that retirement planning is a very personal process, and one that all families should undertake.  When looking at the viewpoints above I think I come down closest  to the “save what you'll need” camp, where you figure out your personal situation, factor in your personal needs and desires, and then come up with a number based off of those.    Once you come up with a number – add 10% to it, better to have too much saved than too little.

While I understand that getting into the nitty gritty details is probably the best idea, I know not everyone will take the time to do that.  If you don't go through with it, at least stick to the old 10-20% rule, and start saving for your retirement as early as you can!

List Of Retirement Calculators

Here is a list of retirement calculators I found via getrichslowly.org.  The ones on this list take into account more criteria than just income, and will probably give you a better picture of what you need to save.

Have you figured out what your retirement savings number is, and how much are you saving towards that number today?  How did you determine your goal?  Do you think you'll reach  it?

Social Security Changes For 2011

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We  had a  tax package passed in December that extended the current tax rates, in addition to making other changes to the estate tax, extending certain tax credits,  and other changes.  One area that saw several changes was the Social Security program.

Social Security benefits are received by nine out of ten individuals age 65 and older, so it's an important piece of the puzzle for many people.  (Whether it should be is up for debate)

The Social Security changes for 2011 will give workers a temporary 1 year tax break on the amount they pay into the entitlement program, in addition to several options for retirees being eliminated. Here's a look at how the Social Security program will change this year.

Lower Social Security Taxes:  2% Payroll Tax Holiday

As was mentioned a while back, the Making Work Pay tax credit expired at the end of 2010.   The expiring credit, which you can claim on your 2010 taxes, amounted to about $400 for singles and $800 for married couples.  Since that credit was expiring, the Obama administration wanted to pass something to replace it to a degree.  Because of that they passed the 2% payroll tax holiday.

So how does the 2% cut work?   The amount we pay into Social Security will drop this year from 6.2% of your income (up to $106,800 annually) to 4.2 % in 2011 only.  The employer portion of that will remain at at 6.2%.

For those who are self-employed, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed by President Obama on December 17th of 2010.

While this move has been criticized by many because the Social Security pr0gram already is having predictions of running out of money in the near future, others say the program's finances won't be harmed because the trust fund will be reimbursed for the tax cut funds from the general fund of the Treasury.    In any event, the program's much publicized problems will still be an issue – even if this tax cut doesn't directly affect the program.

Interest Free Loan Option Removed

In the past retirees were able to start claiming social security payments at the age of 62, and then pay back all the benefits received at age 70, so that they could reclaim social security at the higher delayed claiming rate.  In effect this gives those retirees an interest free loan.

New rules only allow beneficiaries to withdraw their application for retirement benefits within the first 12 months of receiving their first payment.  They may only withdraw once per lifetime.

According to The Center for Retirement Research at Boston College if enough people were to use this claiming strategy it could cost the system between $5.5 billion and $11 billion.   The benefit would go primarily to high-income households who had enough money to take the interest free loan without worries of having to pay it back later.

No Retroactive Benefit Suspensions

In the past retirees were able to temporarily suspend their benefits, and then restart them later – resulting in a bigger social security check based off of the time in which the payment wasn't received. This is still allowed under the new rules, however, social security recipients won't be able to retroactively suspend their benefits, and pay back money already received in exchange for higher payments going forward.

Much like the “no interest free loan” rule, beneficiaries can't pay back money already received. They can only suspend benefits for months when they didn't receive payments or for future payments, the month after the request is made.

No More Paper Checks For Retirees

Social Security recipients will no longer have the option of receiving a paper check if they apply for benefits after May 1st, 2011.    Going forward new retirees will only have their choice of having a direct deposit or having their funds loaded onto a debit Mastercard.

Sending out paper checks to retirees every year has quite a large cost associated with it.  It costs the federal government over $120 million dollars to send out checks.  Making this change going forward will save Social Security $1 billion over the next 10 years, according to the Treasury.

Retirees who are already receiving paper checks can continue receiving them for now.  In the end though they will need to switch to direct deposit or the prepaid debit card by March 1, 2013.