Pensions - What Should I Do ?

There is no time in a person’s life that is too early to begin planning for retirement. The details are a lot to consider beyond basic estate planning, including best investment options like a Roth IRA.

The Roth IRA was enacted in 1998 and ten years later, people are still asking “just what is a Roth IRA?” If you don’t know or want to learn more about the Roth IRA, keep reading to find out how it works, why it can be beneficial and whether it’s the right choice for you.

What is a Roth IRA?

To explain a Roth IRA, you first have to understand a traditional IRA. A traditional IRA is a retirement savings plan that lets employees have income tax deductions for their retirement investments and savings. Once you retire and withdraw that money, it is then taxed. You’re deferring your taxes.

Essentially, a Roth IRA, a new type of retirement account, offers employees the ability to withdraw their proceeds tax-free once they hit retirement. But, they get no tax breaks or deductions for contributing the money in the first place.

Is a Roth IRA right for you?

Every type of retirement saving plan is designed for a particular type of individual and financial situation. Though the Roth IRA can work wonders for some, it’s not always the right solution for everyone.

Before you opt for a Roth IRA, look first into a 401(k). One of the best benefits of a 401(k) is if your employer will match your contributions up to a certain percentage. If so, that’s free and tax free (at the time of contribution) money that you could be passing up by opting for a Roth IRA. You should at least contribute up to the amount that your employer will match.

However, if you suspect that your tax rate will be higher when you retire, then the Roth IRA is likely right for you. For example, if your tax rate currently hovers at 25%, but you suspect it could be as high as 40% by the time you retire, then it’s smarter to opt for the tax-free income later rather than sooner.

To estimate your future tax rate, look at your current position - are you at your peak earning potential, or rather are you just starting out in your career and expecting to earn more in the future? If you project that you fall into the latter, then a Roth IRA is for you. However, if you’re currently earning at your maximum and expect your tax rate to fall at retirement, then you’re better off sticking with a traditional 401(k) plan.

Who is eligible?

The income limitations on Roth IRAs are significantly higher than those for a traditional IRA. With a basic IRA, your income must be $60,000 or lower. With a Roth IRA, a married couple can make up to $160,000.

In the process of learning just what is a Roth IRA, you should also now have an understanding of how the plan works, what its benefits are and how you can optimize your use of this new retirement savings option.

Planning for retirement and estate planning is complicated enough. But it seems like every investment advisor and 401(k) company has been rolling out a new and complex retirement planning tool every week while forgetting the need for a basic and simple retirement calculator.

The idea is to be as precise as possible when helping you estimate the size of your nest egg, but so many are getting lost in the numbers.

And yet, despite their increasing sophistication, they’re still producing inaccurate results and diverging responses. One site will give you one piece of advice while another will tell you something completely different.

One site might allow for variances in state income tax rates while another will account for inflation. One site could ask you to list every asset you have, while another just wants the basics.

The problem is if you start depending on a single Internet retirement calculator or you fail to understand the end result - you could jeopardize your entire retirement.

Remember, underestimating how much you should save each month will leave you broke in your retirement. Meanwhile, overestimating can cause major money problems now as you struggle to make mortgage payments or pay your children’s college tuition.

However, there is a way to get the most out of simple retirement calculator tools. To learn how, keep reading.

Use More Than One

Don’t just depend on a single online retirement calculator to base your entire retirement future on. Instead, try several and pay close attention to which ones ask questions that are more pertinent to your current financial situation.

Merge Your Results

By looking carefully at the questions each calculator asks you and how it arrives at certain conclusions, you can start to understand it better and even merge and combine the different results. For example, one site might tell you to start saving 60 percent of your income while another will advise you to start saving 30 percent. That’s a big difference, but by understanding the results and how they were achieved, you can more likely find the balance.

You Want Features, Just Not a Laundry List

Customization is great as it allows you to fine tune a retirement calculator to your own personal needs and financial situation, but it can also make the process more complicated. Try a calculator like the one offered by the Employee Benefits Research Institute (choosetosave.org).

It allows you to input extra income sources and potential expenses like travel or lifestyle choices that could affect your savings needs. At the same time, it’s simple and easy to follow.

Consult With a Professional

A simple retirement calculator can help you gain an understanding of your financial picture, but your best bet is to also consult with an investment and financial planning professional. They can help you walk through plans, understand your investment options and merge your retirement plans with your current financial situation.