There are those who hear the term “retirement planning” and see it as a concept without truly recognizing how relevant it is. Some think that they’re having a difficult enough time meeting their responsibilities in the present so they stick their head in the sand with regard to the future. This may be understandable on some level, but if you want to be able to retire someday you have to realize that it is up to you to make it possible from a financial perspective.
A poll that was conducted recently found that 64% of baby boomers will be relying on Social Security as their foundational source of retirement income. This is a trap that many people fall into, assuming that Social Security will provide them with all the income that they need and that Medicare will pay all their medical expenses. The reality is that in 2010 the average monthly Social Security check was $1072. And Social Security does not cover a hundred percent of medical expenses, and it doesn’t cover long-term care at all.
Most of us are offered an opportunity to save for retirement via the 401(k) plans that are offered in the workplace. The 401(k) is a retirement savings account that you contribute into on a pre-tax basis. As the funds in the account accrue interest no taxes are levied on these earnings, and your taxable income is reduced by the value of your contributions into the 401(k). So if you made $60,000 in a given year and contributed $4000 into your 401(k) retirement savings account your taxable income would be $56,000.
When you turn 59 1/2 you are eligible to withdraw money from the 401(k). At this time the income that you derive from these withdrawals is subject to taxation. However, there is another type of 401(k) called a Roth 401(k). With these accounts you make contributions after taxes, and when you ultimately receive distributions you pay no income tax.