Planning Briefs

You Could Buy A Dream, Or Do Real Financial Planning

Published Tuesday, July 21, 2009 at: 7:00 AM EDT

TV commercials and newspaper ads extol the advantages of a 401(k) to build retirement savings. They paint a rosy picture of golden years filled with travel, hobbies, and fun activities, and talk about how, with the miracle of compounding, account balances can grow to six- and seven-digit sums. Don’t fall for it. They’re selling dreams.

Understand that there’s a big cost for retirement. You may need more than you realize to make your retirement plan work.

Many investors have a financial blind spot. They make plans for retirement and make investments, but then fail to match up the two. If you’re going into your retirement with $500,000 in savings, for instance, you’d better not have $1 million worth of retirement activities planned. The same applies to kids’ weddings, vacations, and other life events. Plans have to be funded from your savings and investments.

No, you can’t project costs exactly. Plans are ever-changing. But as you approach retirement, you must have a good idea of how much you will need to live the lifestyle you want. Then, you can determine whether your plans are realistic. That’s financial planning—not selling dreams.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).