Retirement Savings Tools
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Retire sensibly with good retirement savings tools. We examine four major retirement saving tools, company pensions, annuities, IRA accounts and real estate. · Company Pension
· Annuity
· IRA Account
· Real Estate
Employer pensions
 Employers are not required to offer pensions. However, the government offers generous tax incentives to encourage them to contribute to a retirement program. There are two categories of employer pensions. A defined benefit plan offers specific retirement income. Some are based on a formula that combines salary and years of service. The employee does not contribute to this type plan. The employee loses his retirement benefit if he leaves the company, unless there is some form of vesting program in the plan. This plan is expensive for the company to administer and is not as common as in the past.
A Defined contributions plan is an excellent retirement savings tool owned by the employee and goes with him, if he leaves the company. This type plan is generally cheaper for the employer to administer in the long run. The employee has the responsibility of investing. Many employers contribute matching funds based on a formula in this plan. There is generally a period of time, such as one year before the employee becomes eligible for the plan. There also may be a policy that allows the employer to retrieve their portion of contributions if the employee is not vested. The 401K, for profit oriented companies and the 403B, for non profit companies are the most common retirement savings tools used in defined contribution plans.
Annuity
There are two types of annuities, fixed and variable.
In a fixed annuity, the insurance company guarantees the principal and a minimum interest rate or other type income. There are many kinds of fixed annuities and variations in the contracts that set the interest rates or other forms of income. Some companies guarantee attractive interest rates or income for a defined period of time to attract new policy holders. This retirement savings tool is conservative and warranted in some cases. However, the investor must use due diligence to thoroughly examine the policy and understand it. In other words, read the fine print.
 In the variable annuity, another retirement savings tool, premiums less defined fees are invested in mutual funds. There is a large selection of funds to choose from. The key here is to define your objectives and review your options with the agent, as you may be more aggressive or conservative depending on your objectives. Ask for prospectuses for the funds considered. There are several guarantees offered that you need to be aware of. For example, the life insurance benefit may be equal to the highest funds values less cash withdrawals. Again, be sure to read the entire contract and ask questions. Make sure that you understand all fees defined in the contract. You will probably be offered several benefits with the policy. Determine if you really need these benefits as they affect your investments in the chosen funds. If you do need a benefit offered, investigate the possibility that you may purchase it by some other means at a cheaper rate.
Individual Retirement Accounts
 An individual retirement account is an excellent retirement savings tool. There are two types of individual retirement accounts, traditional and Roth.The traditional IRA is an individual pre-tax account. An individual tax payer under age fifty nine and one half may contribute up to five thousand dollars per year. If he is over age fifty the maximum contribution is six thousand dollars per year. The rules are the same for a spousal IRA. There are some exceptions. If the taxpayer has a company retirement plan, has a modified income of more than sixty thousand dollars and is single his contributions do not qualify for pre-tax status. If married the maximum joint income is between eighty five thousand and one hundred fifty thousand dollars per year depending on which spouse has an employer sponsored retirement plan. All withdrawals are subject to income tax. If a withdrawal is made prior to age fifty nine and one half, there is an additional ten percent penalty. One exception is that there is no penalty for a first time home buyer who withdraws up to ten thousand dollars. However the ten thousand dollars is subject to taxes.
The Roth IRA is an individual after tax account. An individual tax payer is fully eligible as long as his annual income does not exceed ninety five thousand dollars if single, or one hundred fifty thousand dollars filing jointly. All contributions are subject to income taxes. The maximum contributions allowed are the same as with the pre tax individual retirement accounts. After age fifty nine and one half, withdrawals are not subject to income taxes as long as the funds have been in the account for at least five years. Funds withdrawn early are subject to taxes on earnings and a ten percent penalty.
Real Estate
The equity in your home can be an excellent retirement savings tool. There are at least three options available. They are to downgrade to a less expensive home and invest the balance. If you qualify, utilize a reverse mortgage to generate retirement income. If you are just starting your savings plan, have high interest rate loans, and have equity in your home you may consider refinancing.
A reverse mortgage is another retirement savings tool that allows the home owner, age sixty two or older to receive tax free monthly income for life and remain in his home. There are several options available for the distribution of funds, including a line of credit, a line of credit and monthly income for life, or a lump sum tax free distribution. In all cases the home owner and spouse may remain in their home for the rest of their lives.
You may refinance your home, pay off credit card and other high interest rate loans, and have one payment lower than the aggregate payments. The key here is to save the difference.
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