Will you have the peace of mind to enjoy a dance?
The best retirement plans are the result of a lot of thought,
consulting, and homework. Without a solid plan in place, many
people's "golden" years are anything but.
In 2013, Fidelity and Vanguard put out a paper showing that
the average baby boomer has just $126,900 saved in 401(k)s.
Though Social Security will add to that, those two sources of
income combined won't be nearly enough for the average American
to live comfortably in retirement.
Indeed, one of the greatest shortcomings of the American
public is our inability to plan for the years after we leave the
workforce. Though there is no one-size-fits-all plan to solve
this problem, there are some general principles that can guide
you toward a more financially secure retirement.
A brief history of retirement plans
One of the most important things to acknowledge is that we
aren't hardwired to plan a half-century into the future. In our
hunter-gatherer days, the tribe provided cradle-to-grave security
-- no retirement planning necessary.
Further, according to a study by Merrill Lynch and Age Wave,
it wasn't until the 1950s that the average retirement age
surpassed average life expectancy. Most people simply didn't live
long enough to retire.
Over the past century, retirement planning has gone through
several evolutions. First came Social Security, which remains
more important to retirees than most realize. In fact, only 10%
of retired people have more money in hard assets than they do in
terms of guaranteed Social Security income.
Next came defined-benefit plans, or pensions. Typically, these
are funded by companies and guarantee a certain amount of income
from retirement until death. Though defined-benefit plans were
the only retirement plan available to 60% of private-sector
employees in the 1980s, they are much less commonplace today.
In their place came defined-
plans, which usually take the form of 401(k)s or 403(b)s.
Companies set up these accounts and deduct a certain amount from
the employee's paycheck to be invested for retirement.
Individuals can also put money away in personal retirement
accounts such as Traditional or Roth IRAs. Beyond that, it's not
uncommon for people to use life insurance, home equity, and
personal savings to help supplement retirement income.
How many retirement plans are there?
This is where things can get confusing. There are as many
smart, healthy, financially sound retirement plans as there are
folks heading into retirement.
The list of variables that determine what the "best"
retirement plan is for you is endless, but the primary
considerations include how much money you need to maintain your
lifestyle, what your health care needs are, how much you wish to
leave to your family, and at what age you wish to stop working
Some of the most popular investment vehicles for retirement
planning are target-date funds, which rebalance their holdings as
your desired retirement date approaches. Usually, this means
shifting over time from a somewhat aggressive investing style to
a more conservative approach.
The plans are so popular that experts believe that by 2020,
in defined contributions -- half of all defined-contribution cash
-- will be in target-date funds.
With over 600 different types of target-date funds available,
the most important variable to watch is the expense ratio. This
represents how much you are paying each year to have your money
managed for you. Morningstar reports that the average expense
ratio for a target date fund is 1.09%. However, Vanguard, which
typically offers the lowest fees in the industry, has target date
funds with expense ratios averaging just 0.17%.
Why use a retirement plan?
This article can't even scratch the retirement planning
surface. There are simply too many options out there. That's why
hiring a licensed, fee-only professional to help tailor a
retirement plan that makes sense to you is so important.
The benefits of doing so are clear. The Social Security
Administration's most recent report predicts that benefits will
be cut 23% by 2034. Pensions and other defined-benefit plans are
going the way of the dodo bird. If you want to have a secure and
comfortable retirement, the only person you can count on to look
after your future is
The bottom line on the best retirement plans
Remember, the basics can go a long way toward making the
retirement planning process easier. Start as early in your life
as you can, spend less than you earn, and invest the difference.
Wash, rinse, and repeat. Hire someone you trust to help you
navigate the process.
Follow those simple steps, and you'll be saving yourself from
both headaches and heartaches down the road.
How to get even more income during retirement
Social Security plays a key role in your financial security,
but it's not the only way to boost your retirement income. In
our brand-new free report, our retirement experts give their
insight on a
simple strategy to take advantage of a
little-known IRS rule
that can help ensure a more comfortable retirement for
you and your family.
to get your copy today.
The Basics of Retirement Plans
originally appeared on Fool.com.
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