Certified Public Accountant
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PLANNING FOR RETIREMENT

    

     The overall goal of putting aside funds for your pension is to be able to live comfortably after retirement. According to Internal revenue Service regulations, as soon as you turn (59 1/2), you are able to draw from your pension without penalty. The distributions you take will be subject to Federal and possibly New York State Tax, though the first $20,000 received as pension distributions after age (59 1/2) is exempt from New York State tax.

     The question is how to accumulate enough money to have the option to retire comfortably at an early retirement age (59 1/2). There are two key principles. One, start putting funds away for retirement as early as possible. This could begin in your early to mid twenties. Most mid size or large Companies offer retirement plans where your pension contributions are deducted from your gross pay. For example, if you earn $26,000/year ($500/week) and decide to earmark 5% for pension contributions, the $25 ($500x5%) you contribute would only reduce your net paycheck by $15 or $20 per week. In addition, many Companies will also match your pension contribution up to a percentage of your gross salary (usually a maximum of 3%). For example, if you contribute $25 per week, many companies would contribute 12.50/week. These contributions might seem small, but if you begin early in life and are consistently contributing to your pension, it can grow to several hundreds of thousands of dollars.

     The second key principle to retiring comfortably at an early retirement age (59 1/2) is choosing the proper investment vehicle for your pension contributions. Many Companies offer several options, such as various mutual funds. For example, these mutual funds might invest in blue chips stocks, corporate bonds or a combination of both. Over a long period of time, it appears that as long as you diversify your stock market investments through mutual stock funds or individual quality stocks, the stock market has offered the greatest rate of return.

     If you were to begin investing in stocks and/or mutual funds at age 25 and contribute $2,000 a year (approx. $40/week) until age 65, you could accumulate over $970,000 assuming a 10% rate of return. If you begin at age 35 contributing $2,000/year to age 65, earning 10% per year, your investment would be only approximately $360,000, a difference of $610,000. So one point to be learned is that it is important to have to have the maximum years of contribution for your pension to accumulate. If your Company does not offer a pension plan, you can always make your own contributions to an Individual Retirement Account (IRA), up to $2000/year if you are single, and up to $4000 if you are married. Contributions made to an IRA probably are fully deductible from income on your Federal and New York State Tax returns. Therefore, if you make an IRA contribution for the maximum amount, you probably are able to adjust your withholding at work and take home a little more in your net pay.

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