Planning for Retirement

In the midst of today's economic challenges, the prospects of planning for retirement can be a daunting task. With living expenses rising sharply throughout the country, however, it is no longer advisable to tie your future to traditional pension plans, Social Security payments or even IRA accounts alone. Instead, having a well-balanced savings and investment strategy is the best way to ensure financial stability during the golden years.

Money experts agree that maximizing the benefits of compound interest is essential. In addition, the more time your money has to grow, the better. Thus, it's best to plan early, allowing interest gains from each year to build upon the next.

These same experts also suggest that individuals set realistic goals based on projected retirement needs. While such planning may sound intimidating, a few simple steps will get you on your way.

Retirement Planning: Getting Started

Start your retirement planning by considering how you want to live in retirement and what your monthly expenses will be. Current estimates suggest that, in order to retire comfortably, the average American will require 70 percent of their annual pre-retirement income. Keeping this figure in mind, take into account how much you expect to receive from Social Security and any other existing retirement benefits.

Social Security Fact

If you have not received a Social Security statement in the mail, you can order one online from their Web site.

Don't be too concerned if your projected income does not cover your expenses. This is where proper planning comes into play.

To that end, you will probably end up requiring $15 in investment savings in order to cover each dollar of the shortfall. For example, if the gap between your expenses and your income is $20,000 a year, your total retirement savings should amount to at least $300,000.

If the idea of accumulating that much money sounds impossible, keep in mind that there are several ways to reduce the savings gap:

• If you are over the age of 62, converting home equity into tax-free income is possible via a reverse mortgage.
• Taking a part-time job in retirement is another popular tactic. Not only does working keep a person active, it can whittle down the savings gap dramatically.

Proven Retirement Savings Methods

The average American worker can start investing in a number of ways to jumpstart his or her retirement savings:

• 401k: A 401k plan, in which funds are automatically deducted from your paycheck, is another great way to save money for retirement. Annual contributions to such accounts give you immediate tax deductions in addition to tax-deferred growth, and many employers also offer matching contributions. Talk to your company's human resources staff about your plan. This staff can also give advice on how to make the most of your 401k.
• IRA: An IRA (Individual Retirement Account) is a plan that provides tax advantages specifically designed for retirement investments. The traditional IRA guarantees tax-deferred growth, which means that you only pay taxes on your investment when you make withdrawals. A Roth IRA offers reverse benefits, as you are taxed on your original contribution, rather than on any subsequent withdrawals.
• Stock Market: In addition 401k and IRA investments, financial experts agree that stocks are best when used for long-term growth, as they provide the best chance to achieve high returns over extended periods of time. Stocks are useful in helping investments grow faster than inflation, although, as everyone knows, risk is involved because the stock market can fluctuate throughout the years. Before putting your money into any stock, be sure you understand the associated risks.

Retiring Wisely

Once you hit retirement age, the planning shouldn't stop. Continue to monitor your accounts, assess your investments and spend accordingly. For example, in order to make your money last longer, experts recommend that you withdraw no more than 4 percent to 5 percent of your total savings on an annual basis. Also, it's wise to draw from taxable accounts first, allowing tax-advantaged accounts to compound for as many years as possible.