Your school days may be behind you, but that doesn’t mean you shouldn’t test yourself on various subjects from time to time. And one of the most important topics you can study is retirementplanning. So, take a couple of minutes to take this “quiz.” The answers — and even the questions — may prove valuable to you as you save and invest for retirement.
Have you put a “price tag” on your retirement lifestyle?
All of us have different ideas of the “ideal” retirement. Your brother may plan to travel the world, your sister may want to open her own small business and you may choose to volunteer. Once you know how you want to spend your retirement years, you can calculate about how much your retirement will cost. A financial advisor can help you arrive at a good estimate of how much you’ll need to spend per year.
Do you contribute to your 401(k) or other employer-sponsored retirement plan?
If you have a 401(k) or similar plan where you work, you’ll receive several key benefits by contributing. First, your money has the potential to grow on a tax-deferred basis, which means it can potentially grow faster than if it were placed in an investment on which you paid taxes every year. Second, you typically invest pre-tax dollars, which means your contributions can actually help lower your annual taxable income. And third, you can spread your dollars among a range of various investment choices.
Do you boost your 401(k) contributions every time your salary increases?
If you don’t, you should. Your annual 401(k) contribution limits are pretty high: $15,500 in 2007, or $20,500 if you’re 50 or older. Obviously, the more you contribute, the greater your chances of achieving your retirement savings goals.
Do you also contribute to an IRA?
Even if you contribute to a 401(k), you can put money in an IRA. A traditional IRA has the potential to grows tax-deferred, while a Roth IRA offers tax-free earnings potential, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2. (Income limits apply to the Roth IRA, however.) In 2007, you can put in $4,000 to an IRA, or $5,000 if you’re 50 or older. And you can fund your IRA with a variety of different investments.
If you’re self-employed, have you set up a retirement plan?
If you work for yourself, or run your own small business, you’ll need to set up a retirement plan. Fortunately, you’ve got many attractive options, all of which offer tax deferral and a range of investment choices. Depending on your situation, you can establish an “owner-only” 401(k), a SEP-IRA, a SIMPLE IRA or a Keogh plan. Your tax advisor can help you select the plan that’s right for you.
Have you explored other retirement savings vehicles?
If you’ve “maxed out” on your IRA and your 401(k) or self-employed plan, and you can still afford to put away more for retirement, you’ll want to explore other investments, such as annuities, which offer tax-deferred growth potential and have very high contribution limits.
There’s no passing or failing grade to this quiz — but if you’ve answered “yes” to all the questions, then you’re probably putting yourself in a good position to ultimately work toward your retirement goals.
Jeff Hupman is a financial advisor with Edward Jones in Rincon. You can call him at 826-2694.