Tuesday, April 1, 2008

Retirement Planning and Future Calculations

The internet is littered with a wide variety of calculators, many of which are designed to help you focus on a certain goal. Many are just flat out depressing.

As we have found out, retirement planning is more than just saving money. It is a strategic position, a plan for all of the possible things that could go wrong from health issues not only for you and your family but job interruptions, career changes and forces that exert a certain pressure of which we have little or no control.

Inflation and taxes play a huge role in how we plan but they are almost completely unpredictable. Nonetheless, the calculators still try to paint a picture that will best, and in most cases, sell an idea, product or company that can help you attain that dream. Charles Schwab is no different.

The company is hoping that more companies will begin offering a Roth inside of a company’s 401(k) or defined contribution plan. But is a Roth good for everyone?

Not necessarily. The differences in the two types of retirement plans are based on the way taxes are handled. If you assume that you will be in a lower tax bracket when you retire, sticking with the traditional form of 401(k) will still be the best choice. It provides you with the same contribution opportunities as a Roth 401(k) would but may, especially in the lower income brackets – below $100,000 income, provide you with a better funded paycheck.

Once you get above the $100k limit, a Roth might serve you better.

The calculator that Schwab offers can give you some indication of the differences although it does not calculate the net result of inflation on those contributions nor does it discuss investment options or the fees associated with those investments.

If you use the tool, be sure to check the box at the lower right hand corner. It might give you a more accurate read on where you might be going and whether it is worth changing. If you can take home 9% more now and use that money to control your debt and even increase your emergency savings, a Roth may not be the best option.

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