Retirement Planning Blog

With proper retirement planning, you can add that charm and get rid of stress in the post retirement period. As most of the retirees have to live with a fixed source of funds, it is wise that you make proper planning for your retirement in advance. Here is a quick retirement planning guide to help you to take the right steps and secure your future:-

Wise savings

Perhaps the first step towards right retirement plan is to save wisely. Try to increase your savings as they may prove to be quite a handful after you retire. By planning your retirement properly, you can keep a track of your savings and the spending. If you see that the expenditure is increasing, it is better that you cut down on them and start saving for the future. The savings that you make can be very useful after you retire and come handy while emergencies.

Retirement plans

If you are looking for the right channel to save your funds, opt for some retirement accounts. There are many retirement plans through which you can save your hard earned money and keep funds for the future. You can opt for 401k accounts, Individual Retirement Accounts (IRAs), Roth IRA plan, 403(b) retirement plans, 457 plans and other retirement accounts. In order to choose your right retirement plan, you need to have an idea of the various retirement plans and their benefits and features. Most of these retirement plans provide good increase on your money and you can also enjoy tax exemptions and benefits from them.

While you are maintaining the retirement account, you also need to have some idea of the rate of withdrawing the money. In most cases, one is not allowed to withdraw money before the age of 59.5 years. If one withdraws money before the stipulated age, the tax rates are applicable and also he or she needs to pay a penalty of 10 percent of the amount withdrawn. After you attain the said age, you are free to withdraw the money. However, you should try to keep the initial withdrawal rate to around 5%.

Diversified portfolio

For bagging benefits out of your stock market, try to have a diversified portfolio. This prevents you from the whims of the stock market and also guide you to create a balance between the losses and the profits in the stock market. Usually, your portfolio should be a mixture of stocks, equities, debentures, bonds and other short term and long term invest channels.

Other factors

A proper retirement location adds to the charm of retirement. You need to search for the right retirement location to have a great post retirement period. You also need to maintain a good retirement lifestyle to be in the best of mind and body.A good retirement location will help live a lifestyle that you always dreamt of.

Thus following the tips in this retirement planning guide you can make your retirement life enjoyable.

COLA stands for Cost of Living Adjustments and not Coca-Cola as some might think. COLA is a special retirement benefit which is based on the monthly payment inflation index. After the enactment of the law, an automatic Cost of Living adjustment was provided by Social Security. Through these adjustments, the retirement benefits get increase according to the increase in the rate of inflation.

COLA can be determined by a number of ways. Usually, the calculation is based on the increase in the Consumer Price Index (CPI-W) in the third quarter on the third quarter index of the previous year. The process is pretty simple and is based on some factors such as the Social Security benefits, income of the applicant, the price index, the market condition and so on.

In most cases, the COLA benefits are announced in the month of October every year. The adjustments in the accounts are paid every year in the month of December. The amount of the COLA benefits that you will receive depends as per the CPI-W. Cost of Living Adjustments are also based on the inflation. At times, the yearly COLA can be as high as 14.3% while sometimes it can even come down to 1.3%. Cost of Living adjustments for the year 2008 was around 5.8%.

The 401(k) plans are employer sponsored plans to make retirees and aged, secure and financially stable in the post retirement period. However, there are some do’s and don’ts of 401k plans which you need to take care of. Having some idea about the 401(k) plan will prevent such risks from taking place.

Here are some risks that are involved in the 401(k) plan:

Improper evaluation of returns: Although the 401(k) accounts provide you good benefits, you should never depend on them. While selecting your retirement plan, you need to evaluate the positives and the negative sides and decide accordingly. Most plans provide various options of investment, good company matching benefits and so on. While opting for the plans, try to look into the terms and conditions and decide accordingly.

Investing in the stocks: One of the common mistakes or risks that investors take is to depend more on stocks and mutual funds. Investing too much on the stock market can make you vulnerable to various market conditions. As such, you need to have diversified portfolio to maintain a balance between your profits and losses.

Forgetting the 401(k) matches: Another mistake involved in the 401(k) is not to take the matching contributions. Matching contributions can be very handy in providing you with more benefits. As such, if you employer provides you with the matching contributions, readily accept them. The matching contributions can be a great way to make you financially stable in the long run.

Risks of inflation: A major form of risk associated with the 401(k) retirement plan is inflation. The higher price level caused due to inflation can also increase the rate of interest. This can add to the expenses and can be a big problem for the aged and the retirees. One of the best options to prevent such inflation led losses is to invest in mortgages, immediate annuities, dividend paying stocks and so on.

Michael Jackson’s death teaches us what not to do .During his lifetime Michael Jackson lived a life of a millionaire and spent like a billionaire. Even the huge amounts of income he generated from his albums could not save him from financial crisis .During his last days before his death, he was clearly seen struggling for cash to cover his extravagant spendings.

After years of extravagant spendings, expensive legal cases and questionable business advice, Jackson finally appeared to be attempting sort out his finances.

Even as his hits were drying up he continued spending extravagantly. Michael was an obsessive shopper and collector of costly items .He spent $US 4 million in a single shoping in one Las Vegas emporium.

Jacson was also fighting many legal battles and lost quite a fortune .He was sued $ US 7.8m in London 6 months back by his former benefactor ,Sheikh Abdulla who lent the singer 23,000 pounds

His financial miseries reminds us that, in order to enjoy true financial independence ,it is important to be do efficient financial planning .Here are the lessons we get :

1. Earn more than what you spend.
2. Always Keep track of your spendings
3. Better not buy things that can put you in heavy debt (especially luxury items).
5. Save money for future years

Thus you can avoid mistakes that caused the loss of MJ.

Flexible Spending Account

If you are looking for gaining some financial stability after your retire or even while you are working, you can opt for the Flexible Spending Account. It is also known as the flexible spending arrangement and is sponsored by the U.S. Office of Personnel Management.

The main advantage of the Flexible Spending Account is that it allows the employees to set some portion of the earnings apart for payment of the expenses as the cafeteria plan. The expenses are mostly for health care and also other dependant care expenses. The money that is contributed to the FSA account is exempted from payroll taxes. This helps you to save considerable amount of money.

The most common Flexible Spending Account is the health FSA or medical FSA account. It provides you with many health care benefits and medical care expenses. The FSA account can be utilized by an FSA debit card which is also referred to as the Flexcard.

There are usually two types of flexible spending account. One is for qualified medical expenses while the other one is for dependent care expenses. The FSA is mostly used to pay for the medical expenses which are covered under the medical insurance packages. Some post hospital and rehabilitation expenses are also covered under the plan.

FSA also cover a number of dependant care expenses for the ones who live with you while you are working. Mainly this type of FSA covers child care benefits as well as aged care benefits, spouse care benefits and so on. However, the plan is not applicable for long term care of parents who live somewhere else. Compared to the medical FSA, dependent care FSAs are not “pre-funded”. The employees can only get the reimbursements if the funds are deposited into the FSA. The dependant care FSAs are also subjected to various IRS requirements and conditions.

In today’s economic down slum, it is important that you keep some funds to maintain a descent lifestyle. Well, now comes the important question: should you utilize the money or pay off the debts? You may be losing on vital funds and assets in the long run if you spend too much in paying the debts and do not invest. Proper debt management helps you to maintain a perfect balance between paying the debts and investments.

Proper debt management helps you to have an idea of the various cash flow conditions, the options of investments, the benefits and the risk factors and so on. If you thinking about investing some more funds, you need to have an idea of the tax cost of borrowing compared to the tax rates of investing returns. Your after tax returns can be more than the after-tax debt cost if you have a diversified portfolio.

Business persons may opt for investing the money in their business and not reduce the debts so much while retirees or older adults may pay off their debts first before opting for any type of investments.

To decide whether you need to invest first or pay off the debts, you need to take into account some vital factors such as your age, your source of earnings, the income, the rate of taxes applicable, the time limit of the debt and so on. If you do not want to take risks in the stock markets or investment channels, it is better that you pay your debts first.

Experts say that people who are still working should keep at least 6 months of cash in advance with them and should also try to have a debt-to-income ratio which should not exceed 25-33% in a month. Be it investing or paying off your debt, you should try to have this limit of money and the equation. Also take into account, the financial situation and the economic condition.

It may sound surprising but Social Security can provide you free loans. Under the present scenario, retirees can choose between various options like claiming the benefits at 62 and getting reduced returns or delaying claiming the benefits till 70 and enjoying full returns every month.

Now, in order to get higher lifetime benefits, you can use some unconventional strategies. One of them is known as the “Free Loan from Social Security” strategy. By applying this strategy, you can get some free loans from the social security accounts. For instance, if you claim Social Security at 62 years of age and reclaim the same at 70 years, you can receive a higher benefit. As you only need to pay back the principle loan amount, you can keep the interest and invest it in some other channel.

If you are of age 70 and adopt a Free Loan” strategy, you can first claim some benefits at 62 years of age and again reclaim it at 70 years. The interests that you receive provides you with the head-start’ on reaching the break-even age. In order to be break even, you need to live until you are entitled to the total benefits of social security.