Steve Vernon, writing about retirement for CBS MoneyWatch, claims that two critical questions working adults should ask themselves are 1) how much money do they need for retirement, and 2) how can they generate a stream of income from retirement savings that lasts the rest of their life, regardless of how long they live?
Obviously, the younger you start saving for retirement, the better off you are. But even more important is how you choose to save for retirement. Company pension plans are becoming a thing of the past; working folks might need to put together their own retirement plan.
The benefit of putting retirement savings into an Individual Retirement Plan (IRA) is that you pay no taxes on the money you invest in the IRA. You also do not pay taxes on any wealth that the IRA generates, such as interest. There are penalties for early withdrawal, but if you wait until retirement, then you will only pay regular income taxes on monies you withdraw from your IRA.
Hopefully, you will have saved a nice amount of money by the time you retire. The key here is to invest it wisely and not to spend it too quickly.
Vernon advises that you view the principal amount of money in your retirement savings as an ongoing income generator. One way to do this is to invest the saved money in mutual funds or stocks of your choice. You spend the interest and dividends, but you must not touch the principal if you don't want the money to run out.
Instead of living on interest and dividends, some retirees opt for systematic withdrawals from their mutual fund accounts. This makes it easier to budget, because you know how much money you will get every month. The downside is that the stock market fluctuates. If your stocks are down, more shares must be liquidated in order to make your systematic payment.
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