Protecting Your Retirement

As discussed in class, Individual Retirement Accounts (IRA’s) are a great way to prepare for retirement. Most people begin small investments at a young age and by 50 or 60 years of age they finally realize they have a substantial amount of retirement income. This has been the traditional method of IRA savings but the Supreme Court is now considering how much retirement savings people can shield when they file bankruptcy. As always, abusing certain benefits can create changes that effect everyone working toward retirement. Currently bankruptcy laws protect pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability. The issue today is how frequently people go into debt and figure they can just file bankruptcy and all is well. This individual lack of financial responsibility may generate changes in the allowable amount and which retirement accounts may be protected from creditor. I know many people will say that some times bad things happen and the person cannot help it. This is partly true with natural disasters and unexpected illnesses, but most of the bankruptcies are due to living outside of ones means.

I do not mean by any standard that you must nickel and dime everything you do. What I do stress is to understand that if you make 35 to 45 thousand annually you should not spend 40 to 50 thousand annually although credit card and retail companies want you to. I know this may sound very simple but emotions (and credit cards) usually get the best of us when we desire a particular item now. We discussed options about getting accustom to certain financial practices. With the increased population and more individual financial defaults many companies will have to charge everyone else a higher interest rate or give no credit at all to make up for the loses. This is why it is imperative to live well within your means and to set aside at least 3 months of emergency money in order to get through the rough spots. Also, by establishing an acceptable living standard within your available income, it will make it easier to maintain this level when you receive raises and promotions so that you will be following your plan for retirement and not someone else’s. By having this mentality and reserve you will not have to depend on a 22% interest credit card to get you over the hill and continue to pay that bill for the next 20 years.

The different IRA’s discussed in class is a great way to benefit from compounding interest and also tax free until you need the money at retirement. The two types are Traditional and Roth IRA’s. The Roth IRA is taxed today and withdrawn after 59.1/2 tax-free while the traditional is not taxed today but when you begin to withdraw money after 59.1/2. The traditional IRA can also reduce your yearly tax liability if you fall into certain categories. Roth IRA withdraw after 59.1/2 is tax-free and is highly recommended because you can get many years of compounding increases and pay no taxes on the growth. Both IRA’s can be withdrawn at anytime but there is a hefty penalty, which can consist of a 10% penalty plus taxes on the withdrawn amount. The IRA’s can be established just about anywhere, but first check to see what is offered before you start your IRA. Most mutual fund families have IRA availability but require different start up amounts. Some require the account to be started with either $1,000, $3,000 or some will start it as low as $50 as long as you establish an account for direct monthly investment. You can either go through your broker or call the mutual fund directly and they will send you the documents to start the account. The main issue here is to get it started as early as possible to benefit from the compounding effect.

The Supreme Courts review of certain bankruptcy cases will probably generate governmental changes in the long-term security of retirement accounts. Many individuals will have to change their haphazard attitude toward bankruptcies when their intended retirement is at stake. This is why it is very important to get accustom early to a certain acceptable living standard and maintain this throughout your career to ensure your plan is in play and not the governments plan.