|FPS Insurance Retirement Definition Retirement is a point where a person stops employment completely.|
Planning for the future with Retirement Accounts.
If you Fail to Plan… you are Planning to Fail. Benjamin Franklin
I've regularly talked to people in their 50’s and 60’s who have saved nothing for retirement. When asked when they will retire they all say they would like to retire between 65-70 years old.
I want to share some stories with you to get you thinking about your latter years.
~Planning Case Studies~
Case Study: Martha
Martha worked for a bank when they came out with a new product called an I.R.A (Individual Retirement Arrangement) (See IRS Publication 590). The name actually came from one of the men working on the project at Federal level, Ira Cohen. So she, like our earlier case study Robert, put $2k aside in an IRA. They guaranteed her 10% on her money until she turned 60. This was her 60th birthday. She now had over $65,000 in just that one account.
Case Study: The Business Man - Precaution
I once worked with a couple. They are in their 80's at the time. He says to me,
“You know, I was once a great business man…we had so much money we could go anywhere, buy anything, drive any car. I had more money than you shake a stick at.”
As he stands here telling me his story with an un-ending grin he and his wife are handing out samples at a grocery store.
“Well”, he says “I made a bad business deal…actually the business deal was great, but the guy I was partners with used it to take everything and leave me to fall for it. We lost everything in the after-math, even the house.
If I’d just taken a couple of extra steps I could have put safe guards in place and prevented either the whole thing from happening or the effects of it from hitting so hard.
But I like people and I trusted him and I was blinded by how much money I was going to make on it."
So how do you plan for the latter years? You can be sure of 2 things:
1). God will have to be your source. Money is a resource, jobs are a resource, investments can be a resource, but only God can be your source. Allow his ways and His wisdom and His Word to be your light!
2). You must plan. If you fail to plan; you plan to fail. Allow the leadership of the Holy Spirit through prayer to give you divine instructions and plans. God was speaking to everyone in 2007 to get out of the stock market before it crashed. Those who listened to him got out; those who didn’t got stuck right in the middle of it. You don’t just plan, you pray through His plan for your life. So what kinds of things do financial institutions offer that you can participate in?
You put in $50, your company puts in $50.This means that by adding $50 to your 401k you actually added $100. What makes this even better is the $50 is before taxes. So if you made $2,000 gross income (before taxes) then you actually only get taxed on $1,950.00. This can mean less going to taxes and in some cases can mean you pay so much less toward taxes that your actual Net (money after tax) paycheck is the same, or slightly less.
They focus on more immediate needs.
Another benefit to the 401K is that you build a forced savings from which you can pull from in an emergency. If you need the money you can borrow from your 401K. It acts as a loan with interest but the money you pay back through payroll deductions all goes into your 401K, including the interest. You borrow from yourself and pay yourself back plus some. Sometimes you can withdraw the money without borrowing it.
Another factor to consider is that many times half of that money was put in by your employer if they do matching, so really the employer is paying your 20% tax. 80% of $2,000.00 which you saved is better than 100% of $0.00 that you didn’t save.
They may not give you any FDIC insured products or any access to annuities.
If you want better or broader choices, and you are willing to put some away each month without them making you through payroll deductions, you could be better off with other products.
An IRA is an Individual Retirement Arrangement.
These accounts are self-directed, which means that you are in charge of getting money in and you are in charge of making sure you keep on top of that money so it grows as you wanted it to.
If your company does not offer matching to your 401K this could be a better place to put your retirement.
The benefits are that the money is more accessible, should you need it, and that you have greater control over what it is invested in, even an FDIC insured Savings or CD if you like, which many if not most 401K’s do not have.
As long as that company slaps the IRA label on it, nearly any product type offered by a bank could be an IRA.
Check with your bank or financial institution about what IRA products they offer. Look also for alternative programs, but make sure to check any company through the better business bureau at www.bbb.org.
In order to understand IRA’s you must see them as having two parts.
There is an IRS side and a Bank side.
Understanding The IRS side of IRA and the Bank side of IRA can be confusing.
But let's make it simple.
- Think of the IRS term “IRA” as the umbrella, or the label.
- Think of the Bank side as the container.
- You can place the “IRA” label on many containers and they will all conform to the IRS rules AND the rules of that container.
There are several types of IRA’s but they are all just labels.
First a word on the other types:
In short, the SIMPLE and SEP IRA’s are for small employers and self-employed people. If you are in that situation these may be something you want to do research on. Often self-employed individuals and business owners can make contributions (deposits) into a SIMPLE IRA on behalf of themselves and on behalf of the company they own. This gives the individual tax benefits and the company also gets tax benefits. You can also place money into a SEP IRA for your employees, also getting a business tax write off.
An ESA is an Education Savings Account. This is an IRA designed to build a savings for education expenses of a child. You can get a tax deduction for putting money into a savings for your child and the child can then take out the money tax free and use it for school later in life.
However because the IRS wants their taxes they also have rules that require you take it out eventually. At 70 ½ years old you must start to take out from your IRA so that the government can take their taxes. Because you must start taking money out at 70 ½ you must also stop putting money in at this age as well.
This is for after tax money you put in. If you will be making more money or living at higher tax brackets in your retirement years, you may want to consider a ROTH IRA.
The money you put in is AFTER TAX which means it will NOT reduce our taxable income up front. However all the money you earn on your money will typically grow tax free (consult a tax advisor).
- If that was a Traditional IRA he would be taxed on all that growth.
- In a ROTH IRA that would tax free growth. Not just the $2,000 he put in, but the whole $48,000.
You don’t get a break for putting money in, but you get tax sheltered or tax free growth.
The IRS doesn’t care how long you keep the money in a ROTH IRA because it’s after tax money anyway. Since the IRS is not going to get paid from the money anyway you can continue putting money in to grow tax free well beyond the 70 ½ limit placed on traditional IRA’s.
All investments are a personal decision, many could lose value. Therefore pray through any decision and seek the help of a trustworthy godly financial advisor. Make sure that they are an independent advisor and not one working for a major bank or insurance company. Advisors employed by financial institutions are given quotas of products to sell.
They are more interested in their bottom line than your benefit regardless of what they tell you. They have to be, that is what they are employed to do. An independent advisor, one not working on behalf of a specific financial institution, would be more likely to lay all available alternatives with the full pro’s and con’s for you.
The Insider is a BIG fan of Dave Ramsey:
- Go read/listen/watch Dave Ramsey and he'll teach you how to do it right!
- Listen to The Dave Ramsey Show (HERE)
- Or by his most popular book: (HERE) The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness