What Is The Main Purpose Of Retirement Planning

Retirement planning requires determining what the goals of the individual or couple on during this phase of their life and making sure that the appropriate means are available to achieve them. It focuses on investing, insurance and eventual asset distribution. One of the main issues with retirement planning comes from the need for ensuring that a person has enough income and it is a mix of tax-deferred and tax-free income.

During the retirement phase of a person’s life, they usually receive Social Security benefits which contribute to income. To be fully eligible, there must be 10 years of work experience, during which time the person paid payroll taxes. The amount distributed every month is dependent on the wages or salary received during the retiree’s working life.

To compensate for the lack of income that a person may receive from Social Security, he should invest in different retirement accounts that are available to him. A great number of employers offer plans such as the 401(k) or 403(b) to their employees. Banking institutions also provide traditional or Roth Individual Retirement Accounts (IRA) that the person may contribute to.

As the employer-sponsored plan and a traditional IRA typically provide tax-deferred income, whereby income taxes will be due when distributions are made from the account, income from a Roth is generally tax-free. This is because the dollars used to invest in it are after-tax dollars. Annuities can also provide tax-free income, other than capital gains. It is good to plan for a mix of both.

Although a person begins to receive Medicare after they turn 65, it is often not sufficient to cover all of their medical needs or costs. Out-of-pocket payments for this government provision can often be quite high. There are other insurance needs to address as well, such as life insurance and long-term care possibilities. The first is particularly important when a person either has young dependents or debt.

By gifting away parts of the assets of the retiree during the later years of his life, the person can successfully avoid application of the estate tax in some cases. But, he needs to plan wisely. If he gifts too much over the span of these years, the gift tax will apply and negate the purpose for which he was doing it in the first place.

A professional can help ensure that retirement planning is done correctly and that all of the appropriate bases are covered. The most important aspect is guaranteeing that income is available throughout the life of the retiree. However, there are also other considerations. Protection from asset depletion because of an unforeseen financial risk is also extremely important.

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