Creating a personal retirement plan lets you save and invest your money in a way that helps you maintain your standard of living at retirement age. The uncertainty of Social Security benefits and diminishing pension plans makes it more important than ever to create a personal retirement plan. Your retirement planning strategy depends on your income and financial goals. Familiarizing yourself with how a personal retirement plan works, and the reasons to create one, can help you prepare financially for retirement.
To encourage saving for retirement, the federal government offers several tax-advantaged retirement accounts. For example, IRA, 401k and 403b plans offer tax breaks for individuals who contribute to the accounts. The specific tax benefits vary per plan. A Roth IRA allows you to save money on a tax-free basis, while a traditional IRA, 401k and 403b allow you to save money on a tax-deferred basis. You can benefit further with some retirements plans that allow you to deduct your contributions on your tax return, effectively lowering your taxable income.
Health Care Costs
Another reason to create a retirement plan is because it helps you become better prepared for unexpected medical costs. As you get older, your medical expenses tend to increase and health care needs are more uncertain. A retirement plan allows you to save enough money to cover any out-of-pocket health care costs. According to a December 2010 article by Allison Linn of NBC News, even retirees with employer-sponsored health benefits should save money to pay premiums and uncovered medical services.
Uncertainty with Social Security
Because of uncertainty surrounding the financial solvency of Social Security, it is difficult to know if future retirees will receive their full Social Security benefits. Individuals who depend solely on Social Security income might find it difficult to maintain their standard of living. Creating a personal retirement plan provides a backup plan in the event that your Social Security benefits are reduced. You can determine how much and how often you need to save and what assets you should invest in to grow an adequate nest egg.
Financial Security for Your Heirs
A retirement plan not only details how to save money but how you want your assets distributed when you die. If you own an employer-sponsored or individual retirement account, you can assign beneficiaries to receive your funds.
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