Making Sense of Retirement Mumbo Jumbo for Those Just Starting Out

Working twenty-something professionals should count their blessings at a time when their age bracket is faced with a record unemployment rate. The concept of American retirement has completely changed in the wake of the global financial crisis, and it’s easy to see why many young workers are willingly keeping their minds off of retirement planning. They feel lucky enough to be employed and don’t want to squander precious income and resources on something they perceive as a waste. But it’s because of this same combination of circumstances that young professionals need to get serious about a retirement plan as soon as possible.

There’s a lot of confusion in the variety of retirement options that exist and whether or not they’re the right choice in the long run. This further inhibits the ability of those just starting out to take decisive action. There’s certainly no way to truly predict what course to take, but one thing is for certain: your day-to-day senior living expenses are going to be a lot more than you may realize. If there’s no income from being employed, it’s going to have to come from somewhere. The “best” choice is a decision each of us has to make on our own, but the following is a run-down of the most important components of retirement:

SOCIAL SECURITY & MEDICARE

These two you’re already familiar with as deductions from every paycheck you’ve ever received.
The Social Security Act was passed in the wake of the Great Depression to create a public insurance policy against unemployment, disability, and old age living. Increased life expectancy, the rising cost of healthcare, and general increases in the cost of living have put the senior reliance on social security in question, as most of those in retirement do not receive nearly enough from the program to cover their living expenses. Despite watering down the disbursements, the program is projected to run out of money by the mid 21st century.

Medicare was a health insurance program created by the federal government in the 1960s to cover those over the age of 65 and those under 65 who are permanently disabled or suffer from some other devastating injury or illness. Additional legislation has entitled those who receive Medicare to have it cover their drug costs as well. However, these additional entitlements have put Medicare’s long term existence into question as well.

401(K) AND IRA

Traditionally, Americans who had a retirement plan through their employers had what was called a defined benefit plan. Depending on how long they worked with the company they received a predetermined pension. It was calculable and predictable. But in the last thirty years or so, employers have mostly switched to what is known as a defined contribution plan. This option allows employees to pay into their own retirement plan through their employer tax-free until retirement when the final amount is taxed, or other tax-exempting shifts.

The 401(k) is the most popular of these options. Depending on the particular model your employer or yourself chooses, you can deposit anywhere from $11,000-16,000 into your account without it being taxed for that year. Employers can match your deposits or offer some other form of contribution depending on the specifics. You have the freedom to withdraw your money relatively easily if you choose this option though it may interfere with the lax of tax. Investment options with the 401(k) are limited. In the wake of the 2008 financial crisis, the average 401(k) lost nearly one-third of its value.

Individual Retirement Accounts, or IRAs, are a little more catered toward the individual as the name implies. There’s no option for an employer to contribute in any way and the money can’t be withdrawn, but the money can be invested with much more freedom than the funds in a 401(k). The tax scenario is similar to the 401(k), with deductions on the deposits available up to $5,000. This setup is in some ways reversed in a Roth IRA, wherein any amount of taxable deposits can be made up to $5,000, but withdrawals from the final fund are tax-free.

In April 2011, the percentage of Americans who had investments in their 401(k) or IRA fell to 54%, the lowest point since the statistic has been kept track of.

ANNUITIES

Annuities are simple insurance-style plans wherein the individual pays an insurance company either a lump sum or scheduled payments that guarantee that a set amount of money will be disbursed upon retirement. They leave little to the imagination, but are stable and predictable. Investment options are available but limited and certainly not necessary. In fact annuities should be seen as the conservative reverse of investment retirement options.

The way in which annuities are disbursed is a little backward so far as practical usage goes. Most increase in the amount of money they send out every month over a decade or so. The majority of retirees tend to spend less on expenses as they get older. Considering the instability of social security and Medicare however this safe bet might be a wise choice.

Retirement may seem like ages away, but it’ll be here before you know it. Affording life in real time is your number one priority followed by general savings towards lifetime goals, but retirement should always be on your mind as well. You’re working towards it after all, so you better know what you’re going to do when you get there.