We live in a day that, for the most part, allows us ample time to prepare for the future. Before we make any major decisions, we usually weigh our options, do our research, and try to make informative decisions. In preparation for retirement, the same time and preparation should apply. If used wisely, time can be a real asset in saving for the day when you walk away from your workplace for good.
In order to make educated decisions in retirement, it would first be wise to know the different philosophies available with your dollars and what government plans allow you to do.

In the traditional way of thinking (this would include traditional IRA’s, 401(k)’s, 403(b)’s, etc.) the idea is to save for retirement with pre-tax dollars. These are dollars that would not be included in your income today. They would grow on a tax-deferred basis, which means you would not be taxed along the way on any gain in your investment. When you retire and no longer have earned income, theoretically the dollars would be systematically distributed to you at a lower tax bracket. Notice the word “theoretically”, as there is no guarantee that your tax bracket will actually be lower in retirement. Many people do such a good job of saving for retirement that they actually don’t miss a beat, and walk into retirement with incomes very near what they had in their working years, with the very same tax bracket.

It must also be mentioned that our government’s current national debt is over $13 trillion, and Uncle Sam is amassing another trillion dollars in debt each year and has been on this track for several years. When the money-printing machines burn up, and no more dollars are being printed, you can bet the next step to address this ever-increasing national debt will be with additional tax dollars– our additional tax dollars. This would mean higher tax brackets in retirement, not the traditional thinking lower tax brackets.

Hence in 1998, Senator William Roth received approval of his brainchild, “Roth IRA”. Although the investment vehicle can be exactly the same, the order of taxation is reversed. Now the dollars are contributed with after-tax dollars, which mean they are included in your income. Then, just like the traditional IRA, they grow tax-deferred, but then are not taxed when the dollars are taken out at retirement. The Roth IRA has now expanded to include 401(k)’s, 403(b)’s, etc.

To save for your retirement at any level, with either the traditional or the Roth way of thinking, is good. And with our Social Security System quickly nearing a “pay as you go” ratio, which means one working person will be funding one person in retirement, your own personal retirement plan becomes that much more important. When Social Security was implemented, it was meant to be a supplement to your own personal savings, not a catch-all retirement plan like 85% of our retirees unfortunately, are using it. When Social Security was implemented in 1934, the ratio was 34:1, 34 people employed funding one in retirement. Back then most people actually worked until age 65, and the mortality rate was much shorter than it is today. This compared to now, where people are retiring much earlier and living much longer, puts much more pressure on the system.

Starting early will help you be successful because of one of the main ingredients–time. (The other two ingredients are rate of return, and amount of dollars contributed).

So which is better for you, the Traditional or Roth IRA? Since every situation is unique, it would be important to consult with your advisor to see which was is in your best interest. This would also include seeing if converting a Traditional IRA to a Roth IRA should be a part of your plan. There are many depending factors that include your age, tax bracket, income, etc. that have to be figured in before this can be answered. Then it can be decided if you say “Howdy Pardner” to the IRS now, or at the time you retire. Good luck.

Tim Schumacher is a representative of Strategic Financial Partners in Hays. [email protected]

This article is provided for personal financial information and is not to be considered as financial advice. Under no circumstances does the information in this content represent a recommendation to buy, sell, or hold any security. The views and opinions expressed are those of the author and not necessarily those of the affiliates he represents.

Mr. Schumacher is a Registered Representative of, and Securities and Investment Advisory are offered through Hornor, Townsend, & Kent, Inc. (HTK) Registered Investment Advisor, Member FINRA/SIPC. Branch Office: 130 Springside Drive, Suite 100 Akron, OH 44333 330-668-9065

Strategic Financial Partners is independent of HTK. HTK does not offer tax or legal advice.