When you envision retirement, you probably see yourself living comfortably, doing what makes you happy. Your dreams could be as lofty as traveling the world or as simple as spending more time with your friends and family. Everyone’s vision is unique.
Enhance your income strategy
Like so many other major life events, a successful retirement depends on advance planning. No matter what your age, now is the time to start thinking about where your retirement income will come from. Several possible resources may be available.
For instance, some people assume that Social Security will meet all of their retirement income needs. Others believe that Social Security will dry up before they retire. While no one can say exactly what the future holds, the truth probably falls somewhere in the middle.
According to the Social Security Administration’s Fast Facts & Figures About Social Security, 2012, the government-run program provides less than 40% of the income received by today’s retirees. While some retirees get just a small percentage of their income from Social Security, others rely on the program as their only income source. As you think about how Social Security will fit into your plan, consider that it was never intended to be a retiree’s only source of income. Social Security is meant as a safety net to help keep people out of poverty.
Generally, servicemembers who serve a sufficient time on active duty or in the Reserves or Guard may receive retired pay. Generally, if you serve at least 20 years, you may be eligible for a pension that is a percentage of your base pay. This military version of a private pension is guaranteed for life, adjusted annually for inflation, and immediately available upon retirement from military service, regardless of your age. All military retired pay options are eligible for cost-of-living adjustments based on changes in the Consumer Price Index. In addition, servicemembers who become disabled while on active duty may receive medical disability retired pay. For more information on military retirement plans, go to militarypay.defense.gov.
OTHER SAVINGS OPTIONS
There’s a good chance that even if you remain in the military long enough to be eligible for retired military pay, you’ll be young enough to enjoy a post-military career. The opportunity for a second career opens the possibility to participate in employer-sponsored pension plans and retirement plans like 401(k)s and 403(b)s. Your contributions to employer-sponsored retirement plans come out of your salary as pretax contributions (reducing your current taxable income); contributions and any investment earnings accumulate tax deferred until withdrawn. Some 401(k), 403(b), and 457(b) plans allow employees to make after-tax “Roth” contributions. There’s no up-front tax advantage, but qualified Roth distributions are free from federal income taxes. In addition, employers often offer matching contributions. Employer plans may be your best option when it comes to saving for retirement.
IRAs also feature tax-deferred growth of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (except to the extent you’ve made nondeductible contributions).
Roth IRAs don’t permit tax-deductible contributions but allow you to make tax-free withdrawals under certain conditions. With both types of IRAs, you can typically choose from a wide range of investments to fund your IRA.
Annuities are generally funded with after-tax dollars, but any earnings grow tax deferred (you pay tax on the portion of distributions that represents earnings). There is also no annual federal limit on contributions to an annuity.
Note: Taxable distributions from retirement plans, IRAs, and annuities prior to age 59½ may be subject to an additional 10% tax penalty unless an exception applies.
The cost of waiting
The younger you are, the less likely it is that saving for retirement is a high priority. If you fall into this category, consider this: Time can be one of your greatest advantages. Delaying your savings plan has the potential to be a costly mistake.
For example, say you invest $3,000 every year beginning at age 20. If your investments earn 6% per year, your account would be worth $680,000 at age 65. If you wait until age 35 to begin saving, your account would be worth just $254,000 at age 65. And what happens if you put off saving until age 45? In that case, you would accumulate just $120,000 by age 65. In this example, a 25-year delay cost you more than half a million dollars.
Current and future benefits
When utilized wisely, a retirement savings plan can become your most important tool in planning for retirement. Your plan offers several benefits, including convenience (and possibly free money), tax advantages, and a variety of investments to choose from.
Why save for retirement?
Because people are living longer. According to the U.S. Administration on Aging, persons reaching age 65 have an average life expectancy of an additional 19.2 years.* And since Social Security accounts for only 37% of total aggregate income for aged persons,** Social Security alone may not be enough to see you through your retirement years.
*Source: National Vital Statistics Reports, Volume 61, Number 6, October 2012
**Source: Fast Facts & Figures About Social Security, 2012, Social Security Administration
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