In last week’s article, we talked about some basic truths regarding Retirement Planning. We talked about how important it is to save and invest early. We talked about how inflation can eat up your money. We also briefly discussed when is it right to retire and for how long.

 

This week we will talk about the products one must use to achieve those goals:

 

• Social Security

 

You already have a retirement product with the government. Yes, 80 percent of Americans are covered by social security. Employers and employees normally pay 50 percent each (8.25 percent) towards an employee’s social security fund. In totality, when you become eligible to receive the benefits, social security pays for not just your retirement benefits but also survivor, disability and Medicare.

 

The amount you receive, generally speaking, depends primarily on your working earnings. At age 62, you can receive the minimum amount owed to you. If you wait until age 70, you can receive up to 30 percent more than your minimum. Sadly, most financial planners will tell you that this will only make up around 30 percent of the retirement savings you will need.

 

• Annuities

 

This is a life insurance contract with an insurance company that commits to periodic payments for either a limited number of years, or for your lifetime. Much like a bank account, the annuity account grows based on both your contributions and on relevant interest rates. The payout, considered a long term benefit, besides investment income, is also based on mortality and cost of operations. Annuity accounts are tax deferred, meaning you do not pay taxes on the money until distribution.

 

• Qualified Retirement Plans

 

Employers are required to provide you a defined pension or contribution program. These plans, like other retirement plans, provide favorable tax treatment. An employer can deduct their annual contribution to the program, and the employee contribution is not included in your gross income. The investment income earned is not taxable income, and the monies grow tax-deferred.

 

In this area, there are two major plans: a pension plan, or a money purchase, which is a fixed interest account, and a 401k, which is a non fixed interest plan. The simple but important difference is that the pension account is invested in short term instruments that the employer company controls, while a 401k plan allows the employee, not the employer to invest the monies.

 

• Financial Institution Accounts

 

Today, one can use banks, brokerage and financial advisory firms to use retirement instruments like IRAs and Keoghs. An IRA ( individual retirement account) is an account that you would contribute to yearly, in after-tax dollars. Because it is after-tax dollars, the account will not only grow tax-deferred but also annually tax deductible.

 

A Keogh plan is a “self employed” retirement plan that works similar to the IRA.

 

While there are other more sophisticated products, what you must remember with all retirement accounts is that you cannot take out the money until what the government calls the golden age of retirement, age 59 and a half.

 

So, I tell my younger clients, consider this “dead money.” If you cannot use it, you might as well invest the money to beat the rate of inflation. Outside of a “pension plan” which you don’t control, the other alternatives put you in control to invest, from stocks to mutual funds.

 

If you’re younger, thirty years will be here before you know it. If you’re older, then you have to figure how long your money can last you! Or, in simple terms, do you want to outlive your money, or is your money going to outlive you?

 

Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 24th year as a fee-only financial planning firm specializing in solving one’s financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info, The Parkchester Times and The Bronx Chronicle. Mr.  Rivieccio also pens a financial article called “Money Talk”. Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. Professor Anthony Rivieccio Facebook page is: www.facebook.com/yourfinancialdoctor. You can reach Anthony at 347.575.5045.