Planning for retirement
There are only three things which are certain in life. These are change, death and taxes; so the old adage goes. Retirement should also fall in this category. Retirement marks the shift/change from active occupation. It can be a blissful or frustrating period in life depending on whether an individual had adequately planned for it or not. In the Journal article, Time to rethink your 401(k) plan? Pension protection Act allows employers to redesign retirement plans, Oates & Brown talk about a report by the United States Bureau of Labor Statistics.
According to the report, by the year 2012, at least half of the American work force will have qualified for retirement (Oates & Brown, 2007). Nevertheless, according to Chesser, David and Thomasson in their Journal article titled, To Roth or not to Roth: More choice – an individual responsibility – in retirement investing means workers need to consider their options care fully, research carried out by the Employee Benefit Research Institute, about one third of American workers do not take advantage of opportunities to save for retirement.
More over, more than half of the workers had spent only four hours in a year planning for their retirement. Only about 44%, less than half, were reported to be on the right track with some even being ahead of the retirement planning schedule (2007). It is imperative to plan and save for retirement. This is the only way to make one’s retirement years what they want. Without the necessary financing and guidance, planning for retirement may prove to be a daunting task (Hansen & Wilson, 1989).
The fact that a huge proportion of American workers does not adequately plan for their retirement goes to show that the activity has not been a major priority for most American in the workforce. It can then be argued that the retirement years of this group of people do not turn out like they would have hoped (Chesser, David and Thomasson (2007). According to Ruffenach writing in the Wall Street Journal, this can be blamed on one of the retirement lies that people believe.
Most American workers believe that they are entitled to a pension check upon their retirement. So, they are never actually actively involved in planning for their retirement (2006). Retirement plans needs. This should not be taken to mean that Americans do not plan for retirement plans because no retirement’s plans are place. On the contrary, there are different plans in the market, for instance, qualified and profit sharing plans.
According to Mittra, in the process of planning for retirement, it is important for one to acquaint themselves with the different retirement plans in the market and settle for those that offer the best deals. The best way to go about this is by carrying out research including talking to professional (1991). Profits sharing plans are the most common and they include the traditional 401(k) and the Roth (Individual Retirement Accounts) IRA (Slesnick & Suttle, 2007). A more recent plan is the Roth 401(k) (Chesser, David and Thomasson (2007). Weighing options when planning for retirement
Before settling for any particular retirement plan, it is important to asses different retirement plans against each other. Consider someone who may be unsure of where to invest in the Roth 401(k) or settle for other plans. Unlike the Roth IRA’s which are limited by income rules, the Roth 401(k) are not. More over, the contributions allowed in the Roth 401(k) are much higher than in the Roth IRA. For instance, in 2007, the limit for a Roth 401(k) was set at 15, 500 dollars for average persons but 20, 500 dollars for those who are aged 50 and above.
Conversely, the limit for the Roth IRA was a paltry $4000 and $5000 for individuals aged 50 and over (Chesser, David and Thomasson (2007). In most cases, the traditional 401(k) plans which are funded by individual earnings and pretax dollars are taxed at the point of withdrawal. On the contrary, though the Roth 401(k) contributions are often taxed, the earnings are usually exempted from taxation. As a result, Roth 401(k) allows for higher incomes (Chesser, David and Thomasson (2007).
While the traditional retirement plans have been around for much longer, it is important to note that they have been rising in costs over the years. Consequently, they have been dropped by most employers in favor of contribution plans such as the Roth 401(k) which is clearly defined (Oates & Brown, 2007). Nonetheless, there is controversy about this plan. Consequently, the question that may arise when planning for retirement is whether to Roth or not to Roth? Chesser, David and Thomasson (2007) argue that this is primarily an individual decision.
Before settling for a retirement plan, American workers should care fully weigh all other options. According to Oates & brown, with the addition of Section 404(c) in 1992 to the Employee Retirement Income Security Act of 1974, the responsibility of funding and also directing retirement benefits became the preserve of individual employees. To a great extent, this has left employees extremely disgruntled. However, it is to their advantage because they are able to gauge their personal needs way much better. Benefits of retirement planning Retirement planning has inherent benefits.
While individuals may opt to go at it alone, seeking the services of a professional accountant is a step in deciding on which plan suits them the best. Planning will inform the retirees just how much money they will require given their present life style and income. This requires a critical assessment of a workers needs. It is also at the planning stage that an individual identify a sensible retirement plan (Mittra, 1991). For an individual unsure of which plan to settle for, the Roth 401(k) would be ideal. For one, the contributions allowed in this plan are much higher than in other retirement plans.
In addition, because the earnings are not taxed individuals are allowed higher incomes (Chesser, David and Thomasson, 2007). Thus, the task of planning for retirement rests on an individual. According to Chesser, David and Thomasson (2007), while planning for retirement, the first step involves choosing the best retirement plan. At this stage it is imperative for individuals to first consider their tax bracket. This brings to the fore the issue of investment education. Individuals need to protect themselves against making uninformed decision especially when it comes to how much money they need in their retirement.
According to Ruffenach in the Wall Street Journal, one of the biggest assumptions that most people make when it comes to retirement is, that their tax liability will go down. While it is a possibility, there is also a very good chance that retirees will end up in the same tax bracket there were in pre-retirement or even move to a higher tax bracket (2006). Retirement plan education and research is crucial because then retirees are better placed to choose the retirement plan that will not mean the payment of more taxes.
In this case the best retirement plan would be the Roth 401(k) plan as no tax is charged on withdrawals. With education, retirees may also learn about the advantages of diversifying their retirement investments. Just like in general investment, it is not financially advisable to stick to just one financial plan for the simple fact that it may limit one’s sources of income in retirement. It is prudent to plan for investment in traditional IRA’s as well as Roth 401(k)s as it will help prevent the tax bite from biting later in life; when it is most inconvenient (Ruffenach, 2007).
Furthermore, according to Oates & Brown (2007), investment education protects employers against liability in the event that their decisions result in inadequate retirement funds for their employees. Conclusion Retirement is certain as it is akin to change. Planning and by extension saving for retirement guarantees one’s security in old age. The years after retirement should be blissful instead of worrisome. Like the saying goes, make hay while the sun shines. Though an ideal situation, retirement should start as soon as one joins the job market.
It is important to diversify the retirement plan that one invests in as a way of spreading risks and, educating one every so often about new and potential plans is good. One should begin planning for their retirement early so that they may spend their retirement years comfortably. References Chesser, D. , Davis, C. & Tomasson, T. (2007). To Roth or not to Roth: More choice – an individual responsibility – in retirement investing means workers need to consider their options care fully. Journal of Accountancy, 203(2). Hansen, L. & Wilson, P. (1989). Life begins at 50.
Barron’s Educational Press: New York. Mittra, S. (1991). Planning for a realistic retirement. Journal of Accountancy, 171(6) Oates, N. & Brown, C. (2007). Time to rethink your 401(k) plan? Pension protection Act allows employers to redesign retirement plans. Journal of Accountancy, 203(5). Ruffenach, G. (2006). The retirement lies we tell ourselves. Wall Street Journal. Retrieved March17, 2009 from http://www. financialapproaches. com/article_04. htm Slesnick, T. & Suttle, J. (2007). IRA’s. 401(k)s and other retirement plans: Taking your money out. NOLO: New York.Sample Essay of Custom-Writing