RET - 401Ks and Roth IRAs Lesson

401Ks and Roth IRAs

Introduction

When people think of retirement, they may picture someone on the beach enjoying the sun, or an older couple who now has time to travel the world. It sounds so relaxing and luxurious! However, there is a lot of planning that is required in order to retire. How much money will you need to have saved up? Do you want enough money to just have the basics or retire with extra money available to spend? Planning for retirement is also important so that you do not have to rely on friends or family to support you as you grow older. After years and years of working, you’ll want to be able to sit back and enjoy your retirement!

Retirement Account Options

To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401Ks and Roth IRAs.

Contributing part of your salary to a 401(k) gives you three compelling benefits:

• You get an immediate tax break, because contributions come out of your paycheck before taxes are withheld, which lowers your taxable income.

• The possibility of a matching contribution from your employer. Many companies put their own money into your account as a company perk.

• You get tax-deferred growth -- meaning you don't pay taxes each year on capital gains, dividends, and other distributions.

In Your Notebook: Please take down important notes, such as formulas, and attempt the practice examples on your own before viewing the solutions!

How Much Will You Need?

Although there are a lot of factors that go into a solid retirement plan, one rule of thumb and a good place to start is that you'll need 80% of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when it comes time for you to retire.

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