While most of us have no doubt heard of Social Security as a source of retirement wealth, we may be unsure exactly what that program means. The benefits of Social Security may have changed in recent years, but this does not mean that the program has completely disappeared. In fact, Social Security will likely become more important to policymakers in the future. Despite this fact, previous studies of retirement wealth have largely ignored the role of Social Security. Another problem with these studies is that they usually do not include the cohorts that are approaching retirement. The Health and Retirement Study (HRS) consists of five cohorts of 51-56 year olds.
401(k)
According to the Vanguard Group’s 2006 report, “How America Saves,” 401(k) retirement wealth is expected to grow by an average of 5.4 percent per year. However, the expected returns vary greatly among workers with varying characteristics. Three factors affect the expected return on corporate stocks: relative risk aversion, worker’s age at retirement, and the amount of non-401(k) wealth. Nevertheless, the historical pattern of stock and bond returns suggests utility of an all-stock investment allocation rule.
The future of 401(k) retirement wealth is bright: it is predicted that it will increase from zero in 1982 to about 37 percent in 2005. It is projected to reach nearly 110 percent by 2040. That’s faster than the growth rate of the rest of the pension sector.
SEP IRA
A SEP IRA is a tax-favored retirement plan that can help you accumulate wealth for your retirement. Contributions can be made by you and your employer, up to a maximum of 25% of each participant’s compensation. Contributions are tax-free until you start taking distributions. In addition, employer fees are deductible. If you’re self-employed, you can make contributions up until the end of October, provided you file an extension.
In order to open a SEP IRA, you need to get approval from your employer. The IRS offers a model SEP IRA plan, but you can also create your own. Employers are not required to contribute to the account every year, but they must contribute to all eligible employees’ accounts equally. A SEP IRA plan can be maintained through a bank that offers traditional IRAs or a custodian that is approved by the IRS.
Roth IRA
When you’re planning to save for retirement, you may want to open a Roth IRA. The process is simple. All you have to do is open an account with a financial institution. A professional investment advisor can help you choose the right account. A Roth IRA will allow you to invest tax-free after you pay all the necessary taxes. Moreover, your withdrawals from the account are tax-free once you’re 59 1/2 years old, or five years old if you haven’t reached that age yet.
Another advantage to opening a Roth IRA is that Perks you can transfer money from other retirement accounts. If you’re still working, you can rollover your money from your previous employer’s plan into your new account. However, you should check with your current employer to make sure you can rollover money from your former plan.
Traditional IRA
Traditional IRAs offer many benefits, including the ability to turbocharge your nest egg and stave off taxes while building your savings. Contributions are tax-deductible, and withdrawals are taxed at ordinary income rates. Contributions can reach hundreds of thousands of dollars, and you can max them out to save even more money.
Traditional IRAs provide tax-free growth and can be used to cover unexpected expenses, like a first home or an unreimbursed medical expense. However, you should be aware that withdrawals before you reach age 59 1/2 can be subject to an early withdrawal penalty. In addition, if you withdraw your money before retirement age, you’ll have to pay income taxes on the money.