Retirement income comes from three places -- Uncle Sam, pension plans, and one's own hard-earned savings. But let's face it: Social Security payments aren't enough to comfortably live on, and the days of pension plans are rapidly dwindling. These cold, hard facts further emphasize the importance of our own retirement planning. So what actions can we take to make sure we'll be prepared and self-reliant?
Money really does grow on trees
The best place to invest for retirement is in an employer-sponsored retirement plan, typically a 401(k). Not only do your personal contributions reduce your tax liability dollar-for-dollar today, but your money also grows tax-deferred. Even more enticing, many employers fork over free money.
Chances are good that if you're offered a 401(k) or a similar retirement plan through your employer, they grant you a 401(k) match. Contribute at least the bare minimum to pocket your employer's free money. Employers also often reward employees with annual profit-sharing distributions, which are deposited in our 401(k)s and allocated into the investment selections we've chosen.
Find out more by asking your human resources folks at work. They can get you a copy of your employer's Summary Plan Description, a document that explains the ins and outs of your employer's plan and your benefits.
If you've contributed enough to take advantage of your 401(k) match and if you meet certain income requirements to qualify, then strongly consider opening and funding a Roth IRA, a tax-free retirement account.
Consider more aggressive, growth-oriented investments for funding your Roth IRA since they afford you the best tax-free bang for your investment buck. This is especially true for young investors who have more time for tax-free growth to compound.
If you're closer to retirement or favor more conservative investments, dividend-paying stocks such as Procter & Gamble
Roth IRA on steroids
For investors who may be excluded from participating in a Roth IRA because of the income requirements, a life insurance retirement plan, or LIRP, may be for you. LIRPs are little-known retirement planning vehicles that are designed to merge the benefits of tax-advantaged life insurance and retirement savings.
Think of a LIRP as a Roth IRA on steroids. It's intended to provide you with tax-free retirement income through a life insurance policy featuring potential market appreciation and a life insurance death benefit for those who depend on you. Insurance companies, such as Hartford Financial Services
Take the reins
Regardless of when or how our lawmakers ultimately address our entitlement-program mess, the best retirement strategy is the one you proactively craft for yourself. Make it a point to become knowledgeable about your investment options, and develop a plan for creating your own financial peace of mind.
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