Financial Planning Basics
Saving enough to live comfortably in retirement is a top financial concern for many people. By investing time in financial planning, you can explore ways to ensure a steady flow of income after you stop working. Successful planning may even allow you the option of retiring early.
The Basics of Financial Planning
Once you begin to control your finances, the best financial planning strategy to use is to save and invest at least 10% of personal income regularly. Depending on your age you could put the money in long term growth opportunities (like mutual funds) or more conservative investments such as deferred annuities. Other important financial planning basics include controlling the use of credit cards, minimizing other expenses and taxes, planning and reviewing as much as possible, and, above all, living below your means-in other words, spending less than you make so you actually have something to use for financial planning.
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Financial planning for retirement needs to address two questions:
- How much will you need for retirement, and
- What will be the sources of retirement income?
Financial Planning-Setting Money Aside for Retirement
When learning about financial planning for retirement, you'll find that you usually need 60% to 100% of current income to live comfortably, provided you are currently living in relative comfort. This percentage varies depending on the expenses you have now, which will probably not come into play as much once you retire such as costs attributed to children (food, clothes, education, etc.) and any debt expenses you may currently have (credit cards, student loans, car loans etc.).
For most individuals, there are four basic retirement income sources: social security, pensions, employer tax-deferred savings plans (such as a 401K), and personal savings (including IRA's)-all of which play a role in financial planning. Many of these sources of income can be used to finance an annuity plan, enabling you to accrue even more income.
How Annuities Assist in Financial Planning
Annuities can help you both save for retirement and supplement your income when the time comes to retire. Deferred annuities assist you in tax deferred savings to fund your retirement planning. Immediate annuities give you the peace of mind of a guaranteed monthly income covering your lifetime or a certain number of years.
Types of Annuities
Single Premium Immediate Annuities (SPIAs) are purchased with a single deposit amount. As the name implies, the annuity usually starts making regular monthly payments to you immediately after you turn over the funds to the insurance company..
Annually Renewable Deferred Annuity
This type of annuity resets the interest rate credited to your account each year. The interest rate guarantee extends for one year at a time.
CD-Type Deferred Annuity
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This type of annuity offers an interest rate which is guaranteed over a longer period of time, usually between three and ten years. This annuity is sometimes referred to as being "CD-like" because it is similar to a CD (Certificate of Deposit) you buy at a bank. These annuities can be cashed in early, but just like CD's, there are surrender charges associated with an early withdrawal.
This type of annuity offers a stock market-driven investment with potentially attractive returns and a guaranteed minimum return. There are several indexing methods used to determine account values, each with its own variations and benefits.