Financial Skinny: Retirement Plans

Retirement saving is one of the most important facets of personal financial planning, but not enough Americans are on a path toward affording this milestone comfortably.

Nearly half, 49%, of Americans aren’t contributing to a retirement plan, According to a 2012 survey by the Life Insurance and Market Research Association (LIMRA.) The research also found that young Americans, those ages 18-34, were the most likely to be among those not saving.

With the prospect of kicking back in your later years, what’s getting in the way of Americans and retirement saving? Other research may shed light on that question. According to a recent survey by Wells Fargo, only 50% of Americans thought they were responsible for their retirement. The rest relied on the government through Social Security and employers through a pension. In addition, most of those surveyed severely underestimated how much they’d need after retirement and the cost of expenses like healthcare.

If you’re one of many Americans with no plan for retirement, no investments and not making contributions, here’s the skinny, a few basics, to retirement planning to get you started today.

Estimate How Much You’ll Need

Naturally, the first question you might have is how much will you need to retire. The answer is different for each of us. It’ll of course be based on the age at which you’ll stop working and your living expenses. The ideal retirement age has slowly risen to 67 for the average American worker, according to a Gallup poll. At the same time life expectancy is rising to about 85. That means you’ll need about 25 years of savings.

Lots of factors go into exactly how much you’ll need including: cost of living, healthcare expenses and personal goals for your post-retirement lifestyle. In making your calculations, it’s best to consult a fee-only financial planner but you can also start a simple estimate using one of many calculators available online. CNNMoney has one. Others are available through AARP, FINRA and Bloomberg. Another great tool is the  Economic Security Planner, created by  financial economist Laurence Kotlikoff of Boston University. It takes your estimate a step further by allowing you to account for factor such as when you’ll stop helping a child through college.

What Are the Options?

Retirement planning is a unique patchwork, which really should be designed to each individual. It can include a selection of stock investments, saving accounts, pensions, self and employer-provided accounts – among other options. Plans should be weighed with the help of professionals according to their flexibility, eligibility, fees, benefits and tax implications. See the IRS guide for a complete listing of the types of retirement plans. Here’s a brief breakdown of the most common.

Traditional IRA – “IRA” stands for individual retirement account. In essence, it’s is a tax deferred account that individuals can establish without the help of an employer. In it, funds aren’t taxed until they’re withdrawn –  although there is a penalty for withdrawal before age 59 ½ and you must withdraw money by 72½. Contributions in 2013 are tax deductible up to $5,500 a year or $6,500 if you’re 50 or older.

Roth IRA –  This plan, named after Senator William V. Roth, Jr.,  behaves a lot like a traditional except your initial contribution to it is not tax deductible and interest earned from a it doesn’t qualify as taxable income. In other words, unlike a traditional IRA where you you pay taxes when you withdraw money in retirement, you pay if upfront with the Roth. There are also income limits when it comes to contributing to a Roth IRA, making those who earn under certain amounts annually ineligible to take advantage of them.

401(k) Plans – Finally, 401(k) plans are perhaps the most popular vehicles for retirement savings. Unlike IRAs, they’re employer-sponsored plans where contributions are made before taxes-taxes and employers sometimes match those contributions up to a certain amount – giving workers, in essence, free money, helping them to reach goals sooner. Like traditional IRAs, there is a penalty for withdrawing funds before age 59 ½ and contributions and interest income is tax-deferred.

Photo Courtesy,  401(K) 2013.