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A Retirees Guide to The Future: When to Compromise, What to Hold On to

Retirement will present a great change in lifestyle for anyone who embarks on it. Such change can instill anxiety in a retiree, but with proper financial planning, none of the expected emotions belonging to retirement should stem from financial concerns. There is no “one size fits all’ approach to preparing for retirement, as we all have different financial needs and priorities,. However there are three basic financial accounts that everyone planning for retirement should understand thoroughly: Social Security, IRA’s, and 401K’s.

Our culture today, especially the younger generation, is not a culture of saving. Within the age-group of workers between the ages of 18-25, less than one-third are participating in their employer retirement plan. As a result, many will struggle down the road when retirement becomes an obvious reality. For this reason, as well as the fact that pension plans are becoming a thing of the past, it is very important to educate workers on the importance of saving for retirement as well as what retirement plans are out there. One way of handling this is to simply hire a financial advisor to take responsibility for your plan. However, before entrusting someone else, you should consider all options.

The importance of IRA’s and 401K’s have been enhanced significantly over the past decades due to the worsening state of Social Security. Social Security has long been predicted to run out, or at least grow unsatisfactory mostly due to the fact that procreation has lessened since the Baby Boomer era, creating a situation where there will be significantly more people receiving Social Security than paying into it. While Steve Goss, the chief actuary of Social Security, denies this claim, overwhelming public opinion is that one should not rely on Social Security to help them float through retirement. In fact, they should ignore it unless they are struggling to stay out of poverty. Enter IRA’s and 401K’s:

IRA’s are a very popular method of saving for retirement and do not require employer-sponsorship as a 401K does. IRA’s typically offer more diverse investment options than a 401K would, such as stocks, bonds, mutual funds, etc, giving you more control of your savings. Another thing to consider, if choosing the IRA route, is whether to use a traditional IRA or a Roth IRA. There are significant differences between the traditional IRA rates and a Roth IRA. They both cater to different types of investors, with one major difference being that a traditional IRA offers tax-free contributions but taxes your withdrawals, whereas a Roth IRA does the opposite.

401K’s function similarly to IRA’s, but as mentioned before, they require employer sponsorship. This can be a great thing as many employers will match your contributions up to 6% of your annual salary, and should be taken advantage of by anyone with the opportunity. The current state of the economy creates many problems for saving money, but a healthy 401K can still be all that a retiree will need to stay afloat, in theory. If a person is making $60,000 a year and contributes 6% of their earnings for 30 years with a modest 3% match by their employer, they can conceivably receive $5000+/month for another 30 years from their 401K. While this example does not reflect the reality for many future retirees, a 401K can still play a major role in your retirement as a supplemental investment.

Despite the theoretical beauty of investing in either a 401K or an IRA, there are opponents to both and they have their reasons. Both IRA’s and 401k’s have “hidden fees” and can take away up to a third of what has been put towards retirement. Also, these plans tend to work best for the wealthy, whereas the middle and lower- classes struggle to utilize their accounts effectively. According to, “if you’re young, a minority, female or single, you’ve got extra worries. Middle-aged and older households have increased their retirement savings in recent years, but younger Americans have not. White workers are slightly better off when it comes to retirement savings in 2010 than they were two decades earlier, while black or Hispanic workers are worse off.” These trends suggest that there is a significant disparity between those who truly benefit from their savings plans based on their demographic circumstances and is worth considering before committing to a particular savings plan. If you do not have funds designated for this, it is difficult to take full advantage of the a savings plan that depends on your periodic contributions, be it a 401K or an IRA. Thus, the wealthy are the biggest winners with these plans.

Regardless of what combination of investment decision you make for retirement, one thing that is often recommended is delaying retirement by a year or two in order to better secure a healthy retirement plan. There are several reasons for this, including the recent passing of the Affordable Care Act. Premiums may rise for retiree’s on their health insurance as a result and care providers may complicate their service, making the amount a person has saved all the more important. If a person waits a little longer to retire, it allows them to increase their savings, account for future setbacks, and decrease the amount of savings necessary for a healthy retirement.

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