How do I develop a supplement to my retirement properly?
Let's analyze what are the tools that make up a supplement to your retirement. It is very important to be aware of starting as soon as possible, always taking into consideration our budget and reality, which, by preparing ourselves at an early age, gives us a comfortable retirement.
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We all want a retreat where we imagine ourselves surrounded by grandchildren, or on vacation or simply resting at home. Regardless of how you imagine it, the reality may be different, so it is essential to direct our steps on the right path and reach the goal.
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What do I count on to retire?
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Social Security
What's its purpose? Many misunderstand or that answer, which creates unrealistic expectations about Social Security benefits and what it means for an individual's financial plan. Its main purpose is to provide basic protection for all American workers against the financial problems caused by death, disability and old age. Part of that purpose is to enhance, not replace, a personal insurance plan.
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Assuming that Social Security will meet all your needs, you create disillusionment that ends in heartbreak by realizing that you are inadequately covered, when having life insurance, disability income or some type of retirement plan is essential. Be financially protected and covered at the time of your retirement.
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Social Security is an entitlement program, not a welfare program where Americans have the right to participate in the program's benefits, as long as they meet basic eligibility requirements.
Coverage vs Eligibility
It is very important to understand the difference between these points. Having coverage under Social Security means that the worker actively participates in the program through FICA tax contributions, but may or may not be eligible for benefits. Benefits are based on the status or condition of the insured person, who may be described as fully insured or currently insured. Being fully insured entitles the worker and family to full retirement and survivor benefits (in the event of death). Being currently insured qualifies a worker for a limited scope of survivor benefits.
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The amount of benefits to which a worker has been entitled under Social Security is based on their earnings over the years. Those who pay the maximum FICA tax for their lifetime will receive more benefits than those who pay less than the maximum. What are the benefits that Social Security provides you?
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Retirement
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Inability
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Supplemental income insurance
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Medicare
The federal Social Security program, formally called Retirement, Survivors, and Disability Insurance (OASDI), is the government's attempt to provide a basic fund of financial protection for all working Americans. While Social Security benefits provide an important source of income for retirees, spouses, and surviving children of covered workers, these benefits alone are not enough to maintain a good standard of living. Social Security benefits help but are not a substitute for a well-established personal insurance program.
Final expenses
Part of proper financial planning is having at least 3 to 6 months of your salary saved as an emergency fund. It can be used by your family member to cover most or all of the final expenses generated by the death. Another option is to have life insurance where you allocate a percentage of the death benefit to cover these expenses or have your individual policy directed entirely at them.
Life insurance with an accumulated value.
Life insurance with an accumulated value, gives you not only a death benefit but also the ability to generate an accumulated value. There are different types of products with this accumulation option, which give you protection until the age of 121 years. Implementing the use of life insurance as a supplement to your retirement is a key part of it. The honorable interest within this type of product, which is tax-free during the process or time of accumulation, provides a substantial accumulation of value which, at withdrawal, can be scheduled as retirement income.
**A policy owner is allowed to receive tax-free an amount equal to what they paid for the policy in premiums over the years. When the accumulated cash value exceeds the premiums paid, the difference is taxable. Until the policy is settled, the cash value will continue to accumulate tax-free. No contribution is imposed on the policy owner, even if the cash value exceeds the amount of premiums paid, as long as the cash value remains in the policy.**
Annuities
Annuities, which are the opposite of life insurance, start with a large fund which is reduced over a series of payments. They are made to provide peace of mind when worrying about receiving a lifetime income. Like life insurance beneficiaries, annuity annuitants have a variety of disbursement options for receiving their annuity benefit payments. Fixed (deferred), indexed and immediate annuities give you the option of programming how it will behave, how much interest it will generate and when the lifetime benefit payment begins.
Retirement plans
It is important that we take the initiative and start preparing in advance of our retirement if we want financial security later on. Included in this preparation is our social security, adequate life insurance, health insurance that protects us from illness costs, and a well-planned retirement program that ensures the desired standard of living when income from employment ceases. For many, saving through an employer-sponsored or personal plan is the most effective way to build retirement assets.
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Let's review the options with which we can build an adequate retirement plan tailored to your needs.
Qualified and non-qualified plans
Retirement plans are divided into two categories: qualified and non-qualified plans. A plan qualified by design or by definition meets certain requirements established by the federal government, so it has a favorable tax treatment.
The employer's contribution to a qualified retirement plan is considered a deductible business expense, which reduces taxes on business income.
Earnings from a qualified plan are tax-free while they are accruing in the plan.
The employer's contribution to the plan is currently not taxable for the employee in the years in which the contribution is made, but they are taxable when paid as a benefit and when the employee is retired and at a lower contributory level.
Contributions to a qualified individual plan, such as an individual retirement account or annuity (IRA), are deductible from income under certain circumstances.
The employee's contribution to certain types of employer plans, such as 401(K) plans, are not included in the employee's gross income, which reduces their income taxes.
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If the plan does not meet the specific requirements established by the federal government, it is called a non-qualified plan, so it is not eligible for favorable tax treatment.
Qualified employer retirement plan
The employer retirement plan is the one that a business makes available to its employees. The employer makes all or part of the contributions in favor of its employees and may deduct these contributions as usual and necessary business expenses. Employees do not have to pay taxes on the contributions made in their favor, nor do they have to pay taxes on the benefit fund accrued to them until it is paid. Similarly, contributions made by an individual employee to a qualified employer retirement plan are not included in their ordinary income and therefore are not taxable.
Defined contribution plan.
The provisions of a defined contribution plan outline the amounts going into the plan and identify the vested (irrevocable) account participant. These predetermined amounts contributed to the participant's account are accumulated for a future moment such as retirement, and the final funds available to any participant depends on the total amounts contributed, plus dividends and accrued interest.
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There are three types of defined contribution:
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Profit Sharing Plan
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Stock Incentive Plan (Stock Bonus Plan)
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Money Purchase Plan
Defined benefit plan.
In contrast to a defined contribution plan that establishes predetermined contributions, a defined benefit plan establishes a defined future benefit, predetermined by a specific formula. When the term pension is used, the reference is commonly to the defined benefit plan. Benefits are usually tied to the employee's years of service, the amount of compensation, or both.
Cash or deferred arrangements (401(K) plans)
Within a 401(K) plan, the employee can choose to make a reduction in their current wages and defer amounts to a retirement plan. These plans are often called "cash or deferred arrangements" because the employee cannot be forced to participate and can take their earnings immediately in cash, or defer a portion of the earnings until retirement, with favorable tax advantages. Deferred amounts are not included in the employee's gross income, and earnings credited to deferred amounts accumulate tax-free until distribution. Typically, the 401(K) plan includes matching employer contributions: for every dollar the employee defers, for example, the employer will match fifty cents.
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A cash or deferred arrangement must be part of a profit-sharing plan or stock incentive plan. In addition to meeting the qualifying rules that apply to defined contribution plans, the 401(K) plan must qualify under certain special rules.
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Deferred amounts may be distributed without penalty only due to death, disability, separation from service, or upon reaching age 59½.
Employee deferred contributions are irrevocable.
Special nondiscrimination requirements must be satisfied to prevent highly compensated employees from deferring disproportionately large amounts of their wages.
Employees are not currently taxed on employer contributions to a qualified cash or deferred profit-sharing plan.
Qualified Plans for Small Business Employers (Keogh Plan)
The Self-Employed Individuals Retirement Act, signed into law in 1962, rectifies small business owners and self-employed individuals as employees, thus enabling them to participate in a qualified plan, if they choose to do so. The result was the Keogh retirement plan or HR10.
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A Keogh plan is a qualified retirement plan designed for unincorporated businesses that allows the business owner (or partner in a business) to participate as an employee. These plans can be established as defined contribution or benefit plans.
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Keogh plans are subject to the following:
They are subject to the same maximum contribution and benefit limits as qualified corporate plans.
They must meet the same participation and coverage requirements as qualified corporate plans.
Be subject to the same nondiscrimination rules as qualified corporate plans.
Individual Retirement Plans
The federal government provides incentives for individuals to save for retirement by allowing certain classes of plans to receive favorable tax treatment. Individual retirement accounts (IRA's) are the most famous of these plans. An IRA is a means by which an individual can save money for retirement and receive immediate tax relief. Basically, the amount contributed to an IRA accumulates and grows tax-deferred. IRA funds are not taxable until they are obtained at the time of withdrawal. Depending on an individual's earnings or whether or not they are covered by an employer retirement plan, the amount they contribute to a traditional IRA may be partially or fully deductible from current income, resulting in lower current income taxes.
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Available IRAs include the following:
Tax-deductible traditional IRA.
Non-tax deductible traditional IRA.
RAGE ROTH
Educational IRA
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*ROTH and Education IRAs were created by the Taxpayer Relief Act of 1997. Both IRAs require non-deductible contributions but offer tax-free earnings and withdrawals.
This was a summary of the tools you can count on when building a supplement to your retirement. But much more information exists, so I encourage you to fill out the pre-evaluation form to schedule your consult. Financial analysts with more than 30 years of experience and service are at your disposal to build a financial portfolio of this height. Don't wait for something to happen or it's too late. The time to act is now.