Individuals fund their retirement income from four potential sources: Social Security retirement benefits, employer retirement plans and IRAs, personal savings and investments, and post-retirement employment.
The Social Security “normal retirement age” is the age at which the full retirement benefit becomes payable. The amount of the benefit depends on the person’s earnings history and age when payments begin. Previously, the normal retirement age was 65, but under current law it increases in stages for people born in 1938 and after, eventually reaching age 67 for those born in 1960 and after. Individuals may take a reduced monthly benefit as early as age 62. Once payments begin, they are subject to annual cost-of-living adjustments. Social Security retirement benefits are generally nontaxable, but become partially taxed if the retiree’s income (or joint return income) climbs above certain threshold amounts.
According to the Social Security Administration, less than one third of people who receive Social Security must pay some taxes on their benefits. (Source: www.socialsecurity.gov/pubs/10024.html.)
Qualified employer retirement plans may be defined benefit pensions, which pay a pre-established monthly benefit to the retiree, or a defined contribution plan, in which the employee’s individual account balance at retirement determines the retirement benefit. 401(k), 403(b) and profit-sharing plans, in which a participant has an individual account balance, are very popular.
Individual Retirement Accounts and Annuities (IRAs) may be“traditional” or “Roth” IRAs. Contributions to traditional IRAs may be tax deductible, while Roth IRA contributions are made with after-tax dollars and are never deductible. Distributions from traditional IRAs are in whole or in part taxable as ordinary income. Distributions from Roth IRAs may be federal income tax free if certain strict requirements are met.
People preparing for retirement can make use of a wide variety of personally owned savings and investment vehicles during their working years. Among those most widely used are savings accounts, certificates of deposit, money-market mutual funds, and government savings bonds.
Speculative investments such as stocks, bonds and mutual funds are also popular. Another sector is precious gems and metals and includes personally owned bullion or coins, gemstones, and stock in mining operations. Real estate can also generate retirement income and includes personally owned property and property owned through an entity such as a limited partnership.
Annuities can provide retirement income in fixed or variable amounts over the annuitant’s life or the life of a second annuitant such as a surviving spouse. Annuities may also provide income tax deferred accumulation and creditor protection*. LIFPro, a confidential private sector strategy which may provide participants tax deferred market driven growth with no market risk, income tax free retirement income, statutory creditor exemption in certain states* and income tax free survivor benefits as well as critical or chronic care benefits.
It is important for people to consider their risk tolerance and time horizon when selecting personal retirement assets. Ask your TCFG advisor to help you evaluate these various tools and their suitability to your specific situation.
*Varies by state. Texas Property Code Section 42.001 Texas Insurance Code Section 21.22 -1108 Unlimited exemption of cash values and proceeds of personally owned Life & Annuity insurance contracts