Dec 12 4 Important Reasons To Start Saving For Retirement Now
Planning for retirement is as important as planning for any other milestone in your life, such as planning and saving for your kids’ tuition. When we talk about planning for retirement, we are basically referring to the process of saving for your old age. Contextually, the word “planning” refers to all activities and processes that go into starting and nurturing a sufficient savings nest for your sunset years. The planning process starts with some research and decision-making where you have to study and pick the best retirement savings plan for you based on several factors such as your employment status, your net income, and any other relevant personal details. Speaking with your Clifton NJ accounting firm can help you get on the right path and make the best decisions for your situation.
Types Of Retirement Plans
There are two main retirement savings schemes, the IRA (individual retirement account) and the 401(k). The 401(k) is a legally mandated pension plan for all employees. 401(k) contributions are deducted directly from the salary of an employee and some employers match these contributions. These contributions are exempted from tax but withdrawals in retirement are taxed like regular income. There are two major types of IRAs, traditional and Roth IRAs. Contributions to traditional IRAs are exempted from tax but Roth contributions are not.
However, withdrawals from traditional IRAs are taxed as income but those from Roth IRAs are exempted from tax. Other savings plans are SIMPLE (savings incentive match plan for employees) IRA and SEP (simplified employee pension) IRA for small businesses and for the self-employed. Whichever plan you choose, you should start saving ASAP because of the following reasons.
As mentioned above, all types of investment plans enjoy some type of tax credits. Contributions to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s are all made with pretax income. This means that your retirement nest will grow tax-free, which translates into double savings. And although contributions to Roth IRAs are not exempted from tax, the lump sum savings in retirement are all tax-free.
It’s A Sound Investment Plan
Retirement plans grow your savings at a steady and substantial rate over time. All Contributions to 401(k)s and IRAs are invested in foolproof investment portfolios by professional money managers in the respective financial institutions. And as mentioned above, your investment will grow tax-free for most retirement plans and the gains might even be untaxed for other plans.
As any professional Clifton NJ accounting firm will tell you, starting a retirement plan early or when you are young is very rewarding. This is due to the “miracles” of financial compounding. With retirement plans, your savings grow at a compound interest rate. This means that in addition to your own contributions, all the interest earned by your savings also grows, which is a very rewarding arrangement in any financial setting. If you start saving now, your compounding principle will grow exponentially even if your monthly contributions are relatively small.
Guaranteed Comfort & Financial Security In The Future
Old age is usually more financially demanding than your working age. Contrary to popular belief, retirement does not mean lower expenses. Although you may have cleared your mortgage and schooled your kids by then, you will still need some funds for your day-to-day expenses. Plus your health might deteriorate with time, which means more expenses for specialized healthcare. And do not lie to yourself that social Security will do, it won’t be enough. And it might even be scrapped in the near future; just a cautionary rumor. In other words, you will be old and on your own — so start saving now! Working with accountant will help you set a plan in motion that can help you get where you want to be when retirement arrives.