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RETIREMENT PLANNING: HOW MUCH RISK IS TOO MUCH?
Retirement planning is a necessary component to living comfortably after you retire. There are so many options out there it can be tough to decide on which one is the best, especially when it comes to the taxation of all the different plans. But the truth it no specific one is the best, the truth is that a healthy retirement portfolio diversified with a combination of accounts that will pay out in both taxable and non-taxable income in retirement.
Indexed Accounts: indexed accounts are a great way to minimize or even eliminate market risk and get up to double digit returns in years stock markets do well. Indexed accounts invest your contributions into a stock market such as the S&P 500. In years that market does well your money will grow with potential double digit growth. Indexed accounts have a minimum return guarantee which helps to eliminate market risk. So, in years the markets are down you will have no losses or your money will grow at the minimum agreed upon rate. Indexed accounts are a great way to take advantage of market ups without risking losses in years the markets go down. In fact Warren Buffet is a huge proponent of indexed funds for growing and protecting wealth. Click the link below to find out why:
401k employer sponsored plans: a person should always take advantage of a 401k that has matching contributions from their employer. You should, however, examine just exactly what the service fees and charges are in these plans but as an employer may offer to match funds up to a certain point it is almost always a good idea to contribute to these plans. Additionally, the amount you pay into a 401k is tax deferred meaning that you do not pay income taxes on the money that you contribute. However, when you withdraw the money it is taxed at your current income tax rate. So, if you are in a lower tax bracket in retirement you have a net positive tax implication when you withdraw funds in retirement. Conversely, if you are in a higher tax bracket in retirement (which some people are finding they are, these days) than you were when you contributed those funds you will have negative tax implication when you retire. There are also severe penalties on any withdrawals you make before age 59 1/2 (10% penalty plus the income taxes). Finally, there is market risk associated with 401k's. Many Americans were gravely disappointed to lose upwards of 40% of their accumulated funds in 2008 when the stock market crashed as 401k's generally invest the contributions in market based funds.
Independent Retirement Accounts (IRA): IRA's are also a great way to save for retirement. They are similar to 401k's but differ in that they are generally funded by an individual outside of their employer so they are very popular with self-employed individuals. Generally, they are also funded with money that an individual has already paid income taxes on which is nice because that means when one takes withdrawals the money is not taxed as income- it pays out tax free! AS with 401k's there is market risk associated with IRA's as they generally invest your contributions into market based funds. Most IRA's lost upwards of 40% in the 2008 stock market crash. There are two types of IRA's: traditional IRA and Roth IRA. Click on the link below to learn more about those differences.
Complete Life and Health can help you find the best way to start or diversify your retirement portfolio. Contact us today for a free, no obligation consultation.
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