Among the life events that need financial planning, your retirement is probably when it is most needed. This is a time in your life when you stop working and rely on the savings of the past to finance your daily needs. You are approaching the last years of your existence and we all want to live it out in peace and relaxation.
This is the reason why everyone is encouraged to have retirement plans. You want to make sure that you are well prepared for this time in your life. While you are still strong and able to work, you need to put aside money to help your future self survive despite your inability to earn your keep.
What are the changes happening to pension plans?
On October 31, the IRS announced that they will be implementing some changes in the retirement plans come 2014. The changes will be effective on January 1, 2014, and it will be mostly on the dollar limitations of retirement-related plans. The government agency explains that the effects are caused by certain cost of living adjustments. While that is true, the adjustments on the Consumer Price Index are not enough to affect the limitations imposed on the 401(k) and IRA plans. The details are on their website, IRS.gov if you wish to see the whole article but here are the highlights of the announcement.
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Employees with 401(k), 403(b) and most 457 plans will not feel any effect on their contribution limit – which remains at $17,500. The same applies to the Thrift Savings Plan of the federal government.
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For employees aged 50 and above who are trying to make catch up contributions on top of the usual amount, the limit remains the same at $5,500. This is applicable to those contributing to their 401(k), 403(b), most 457 plans and the Thrift Savings Plan of the government.
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The IRA (Individual Retirement Arrangement) annual contribution is also the same at $5,500. The catch-up contribution of individuals who are 50 years old and above will also remain at $1,000.
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Taxpayer deductions on traditional IRA contributions will be phased out for heads of households and single individuals. At least, this is true for those who have their retirement plans covered by their employers and have AGIs (Adjusted Gross Income) of $60,000 to $70,000. The salary bracket increased from 2013’s AGI of $59,000 to $69,000.
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Married couples who file jointly and with one spouse with an IRA contribution being covered by their employer, the phase-out salary range is $96,000 to $116,000. This went up from $95,000 to $115,000.
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IRA contributors that are not covered by their employers but has a spouse who is, the tax deduction is phased out as long as the income of the couple is within $181,000 to $191,000. This also increased from the old range of $178,000 to $188,000.
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Married individuals who chose to file separate returns despite being covered by their employer’s retirement plan will not have any changed on their phase-out range – which remains at $0 to $10,000.
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Taxpayers who make contributions towards their Roth IRA has an AGI phase-out range of $181,000 to $191,000 (married couples filing together, up from $178,000 to $188,000), $114,000 to $129,000 (singles and head of the household, up from $112,000 to $127,000). No adjustment is made on married people who have chosen to file a separate return.
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The AGI limit of those getting retirement savings contribution credit is as follows: $60,000 (married couples filing together, up from $59,000), $45,000 (head of household, up from $44,250), and $30,000 (singles and married contributors filing separately, up from $29,500). The saver’s credit is for low and moderate income contributors.
*Source: http://www.irs.gov/
What does this mean for your plans of retirement?
So what do all of these changes mean to your retirement plans?
When you are trying to determine how much you will need to retire, you always have to factor in the inflation rate. This means you have to think about how much your money will be valued in the future. $100 today will probably be worth $75 in the future. You have to be careful to keep an eye on the Consumer Price Index so you can determine if your savings are still at par with the cost of living adjustments in the country. Otherwise, everything might fall short when you retire.
The adjustments and lack of some means that the CPI has not really changed all that much. If it does, then you know that you might have to increase your contributions so you will have enough when you retire. This is why the IRS adjusted the contribution limit – to allows consumers to put in more money on their retirement plans.
Just remember that when you are computing for your target retirement fund, you need to consider a couple of details about your dream life when you retire. It is not really difficult to determine this because there are online calculators that you can use to help with the actual computations. You have one from MSN.com that will help you figure the amount that you will target and one from AARP.org that will help you determine if you are saving enough. But beyond the technicalities, there are a couple of factors that you need to think about like:
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Your home preferences. Home-related expenses will eat up a huge percentage of your budget. This is why a lot of people choose to downsize.
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Your lifestyle choices. This is another area to downsize but still, costs are to be expected. But by choosing the right lifestyle, you can make your retirement fund last longer.
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Your health conditions. If you have a couple of health concerns that require medical treatments, then you need to boost your funds from health-related expenses. Think about this as you make retirement plans.
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Your existing debt payments. If you still have debt payments and you know that they will spill over to your retirement, consider these as well.
4 myths about retirement planning
Planning for your retirement is not something that you should ignore because your future self deserves a good life. The earlier you start, the less you have to contribute every month. You will be spreading the retirement contribution thinly and that makes the requirement easier to bear every month.
Apart from the issues that you need to resolve during retirement planning, there are also some myths that you need to get over.
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You don’t have to save for retirement until you are in your 40s. This is wrong. Some people think that their child’s education, home buying, and other life event expenses are more important. Contrary to that, the earlier you start, the less monthly contribution you will have to make.
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You are basing your retirement contributions based on what your company is giving. This is also wrong. Experts say that you need to contribute 15% or more of your annual income into your retirement. And you have to keep an eye on the inflation rate to ensure that you are saving enough.
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You estimate a couple of hundred thousand to be enough for retirement. Try not to guess when it comes to your retirement. Use actual figures and the online calculators that we mentioned earlier. This is not one of those that you can guess and live comfortably with.
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You can retire early if you want to. Well, there are a lot of baby boomers who found out that this is not as true as it seems. Some of them were forced to work longer because they had debts to pay off or they did not have enough for retirement. Do not make the same mistake.
There is a reason why retirement plans are important and you owe it to yourself to make sure that you will be well taken cared of when you get old. Do not lose the chance to pay yourself for all the hard work that you have done and will still do leading up to your retirement.