Chapter 5. Is it ever too early/late to plan for retirement?

It is never too early or too late to plan for retirement. However, the earlier you start, the better off you will be prepared to enjoy your golden years (thanks to compound interest and the time value of money concepts). It is critical that you understand your retirement option investments as early as you possibly can.

 

How to

There are about 10-12 different types of retirement plans available, but most people commit up to 3 different types. Here are a few examples of retirement accounts prevalent in our society.

 

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1. Individual Retirement Accounts (IRAs)

(a) Traditional pre-taxed IRA: The logic behind opening a traditional IRA is to take advantage of deferring tax liability until you reach retirement age. You do not pay federal income tax on a traditional IRA at the time of contribution, but when you are eligible to withdraw from the fund at retirement. Hence, you are investing a higher amount (gross versus net income). This also lowers your Adjusted Gross Income (AGI) which reduces your current tax year liability. In addition, the chances are your tax liability at the time of retirement is not significant due to a drop in yearly income, thus, you have invested your money and your tax portion in a tax-sheltered account. 

(b) Roth IRA: A Roth IRA is an after-tax account (you are using your net income to fund a Roth IRA) the interest earned is not taxable and your withdrawal at retirement time is not taxable for federal income tax purposes. A Roth IRA is highly desirable because it is more flexible than the traditional IRA in terms of withdrawing funds and paying federal income tax. Still, there could be restrictions and rules, so you always need to check with your financial institution before making investment or withdrawal decisions.

 

2. 401K Retirement Accounts

These are usually offered as an employment compensation package. Most are pre-taxed for the same logic as the IRA's traditional accounts, as described above.

 

3. Social Security Income 

As a nation, we are very skeptical of the future of the Social Security Retirement benefit. Nonetheless, it is a significant benefit that you would want to take into consideration as you plan your retirement. It is advisable to visit the website, https://www.ssa.gov/ Links to an external site., for the social security administration and create an account to manage your future benefits.

 

Practice

Now that you fully understand your available options for retirement, it is never too late to make a plan and watch your money grow for you to use in your golden years. Think of paying it forward and discuss other retirement plans with a friend or a family member.

 

Congratulations! Now Test your knowledge about Saving & investing!

Would you like to review again? You can start over at Introduction.

To review the full module on Saving & investing, click here.

 

The Penn State Sokolov-Miller Family Financial and Life Skills Center hopes you have enjoyed this module in the MoneyCounts: A Penn State Financial Literacy Series. Please tell us how we can serve you better, leave us a feedback, ask a question, or request additional information at: finlit@psu.edu