Introduction and Retirement Planning Rationale
This paper is going to cover the analysis of the retirement planning based on a particular example, evaluation of the return issues, including risk management and retirement planning rationale. The paper will also address the investment strategies and alternative risk factors with implications on the retirement plans such as IRA, Roth IRA and 401(k). The idea is to make people think about retirement, as well as the proper time to get ready to plan one’s life, while managing a perspective for the future. Today, every single person in the world, despite the country and age, should think about retirement plan in order to remain sustainable during the pension time. The earlier people start thinking about their retirement age, the more chances they have to endure a favorable future. This is important mainly for achieving personal goals for their lives. Every person has objectives, as well as perspectives to manage; the difference is, not all the people succeed in such a planning. Thus, the overall contingency plan would be to use the retirement plans such as IRA, Roth IRA and 401(k) as well as add 20% of the total sum of money over the calculated retirement spending as this will cover the associated risk factors and help meet the goals for the retirement period of life (Bodie, Kane & Marcus, 2010).
Analysis of the Calculations
In order to assess the retirement procedure, there is a need to address the following aspects: retirement age, annual income, market value in terms of personal savings and investments, consider the inflation over years, and contribute a pension plan, including social security administration. In other words, it is possible to assume the age of about 40 years old, as this is the time most people start thinking about their retirement. The overall income is about $45, 000 a year, the acceptable retirement age is 65 years old. In addition, there are about $50, 000 in savings and $50, 000 more in investments. The difference would comprise 25 years with accepted annual rate of inflation of 6%. The approximate social security benefit would be $15, 600 for the yearly retirement plan. The desired retirement planning calculations consider the sum of $40, 000 a year, in order to sustain the same level of living in the retirement age. Considering the current monthly income, the retirement amount would be around $2, 000 per month. Thus, the approximate retirement would total about $24, 000 during a year. If considered the inflation for these years, the average generated money for retirement would be around $400,000, considering the 6% rate of inflation and $24, 000 as a desired sum of retirement money (CNN Money, 2013).If considered the sum of $400,000 this could be not enough to sustain the future goals, as there are more aspects to have in mind. Every sum of money is going through the tax system, and if to consider the inflation rate other than about 6%, it would be even less money to manage the future objectives. Moreover, there are many unpredictable aspects to bear in mind for the future, the most important of them are health conditions and possible expenses in the future that are unexpected today. Therefore, this should increase the number of saving to $600, 000. At the same time, the retirement age could also be different, and it is possible to admit that there enough time to plan before the retirement age. The same pertains to the years of life, it is not possible to predict the events, but it is quite possible to prolong the lifetime with proper life conditions and care for the future. The idea is to constantly review the estimations and update the changes in the retirement plan. Besides, the data for the asset allocation in the retirement calculator indicates the importance to invest in the following allocations: 15% in bonds, 45% in large cap stocks, 20% in small cap stocks, and 20% more in the foreign stocks. Therefore, it is also important to consider these aspects of investment, in order to add to the estimated average of the retirement planning fund. Thus, the outcomes of the retirement calculator as well as the individual calculations on the retirement age offer the sum of about $800, 000 (CNN Money, 2013).
Retirement Risk management and Investment Strategies
The risk management of the retirement age is quite a ‘heavy’ thing to think about due to the recent financial crisis that threatens the capital markets, global economy, as well as the safety of retirement planning. Today, there are different programs that help sustain the payments and financial risks, though there is a great risk of retirement management due to the overall economic instability in the world. It appears, the most respected and trusted way to keep oneself afloat is personal strategy of generating income along with managing it effectively towards financial programs, which help both to invest in retirement saving programs and remain sustainable within the current decade (Society of Actuaries, 2011).
In order to manage the risk effectively, it is important to split the income with the help of different risk management programs that could help to remain sustainable in the future period of retirement. In other words, people should always mind the possible risk factors, such as longevity risk, inflation and interest rates, stock market and financial crisis, employment, healthcare, and many other unexpected risk factors. Thus, in case of effective management of the retirement planning, the risk and return issues would go to a minimum. In order to increase the longevity period one could think about a special approach to one’s health in terms of nutrition and any physical activity. The risks of inflation as well as the interest rates, stock market and financial crisis are not possible to envision, though it is always possible to retire an additional amount of money; usually 20% of the total retirement sum of money is enough to cover the difference. The same is for the specific risks that are associated with the asset classes, for example, employment and / or healthcare; they have a tremendous impact on the level of assets as well as on the retirement planning. In order to predict such risks, it is important to plan the employment according to the inner feelings and beliefs that define the scope of productivity and most often result in the better income. The other unexpected risk factors are even more difficult to predict, though, the minimum that could be done is the same 20% of the total retirement sum of money to be added to the overall plan for retirement. In fact, there are different kinds of programs to manage possible risks in terms of insurance, healthcare, and other independent support programs. The most important of them are IRA, Roth IRA, and 401(k).
The Individual Retirement Account (IRA) is considered one of the governmental programs that offers retirement advantages programs that helps people tackle tax system and, at the same time, keep their savings safe. IRA is a form of a social benefit that people use, in order to have numerous benefits in terms of taxes or allowance. People trust it all over the United States, as IRA holds almost 25% of nations’ assets. The asset categories that are encompassed through IRA are equities, bonds, money, balanced funds and other annuities. The Roth IRA is about the same individual retirement arrangement with a slightly different plan of retirement that consists of more benefits in terms of taxes and other privileges for the American citizens. The most important aspect of Roth IRA is that it does not require people to pay taxes. However, the negative aspect of it is that the amount of savings is not that much for the adequate retirement plan. It also allows participating in different investment operations with securities, stocks and bonds, though this is a personalized retirement annuity (Topoleski, 2010).
There is a different account named as 401(k) account, which implies the United States tax retirement plan. It also has limits in terms of annual expenditure of not more than $18, 000. The money is supported by the tax-overdue system that helps managing funds in terms of payment issues. In other words, it works as if it is deducted from the income in advance of taxes; however, the taxes are applied afterwards when there is a need to use the funds through the 401(k) account (ICI Research Series, 2000).
The research has shown that it is vitally important to proceed with the retirement planning in the youngest years. The calculations of a particular case examine the procedure in detail along with the analysis of the retirement risk management and investment strategies such as IRA, Roth IRA, and 401(k). The allocation of assets was taken into consideration along with the financial investment approaches and acceptable risk factors (Bodie, Kane & Marcus, 2010).