Basic Retirement Questions

Retirement is a complicated topic because there is nothing in life that prepares us for retirement. The only way to know what to do in order to be prepared for retirement is seek expert financial advice, consult websites to collect some of that information - or both. Here are some frequently asked questions about retirement:

Q: When should I begin preparing for retirement?

A: The simple answer is immediately. The earlier you begin to save for retirement, the more money you can save and the better able your investment portfolio will be to shake off an occasional downturn in the economy. Similarly, the sooner you understand all the components that play a role in your retirement, the better off you'll be. For example, that means understanding the role Social Security plays in your retirement or how to calculate how much money you'll need when you retire and how to reach that figure if your current savings track looks like it will fall short.

Q: How do I find a retirement expert who will provide reliable advice?

A: There are several different types of financial advisors, and the best one for you is someone who comes recommended by a person you trust. If you cannot find an expert you trust implicitly it's important to know that it is possible to find financial experts who charge a flat fee as opposed to others who earn commissions or fees from products that they sell. That doesn't mean an adviser who earns commissions from financial products isn't completely trustworthy. However, some people may feel more comfortable with a financial consultant who won't be personally enriched if you purchase a recommended product.

Q: Are financial calculators a good idea?

A: Financial calculators are a great idea. Many people rely on retirement calculators instead of paying for advice on when to retire and whether there will be enough money saved when you want to retire. Make sure that any calculator you choose - many are available for free on the Internet - allows you to factor in inflation, as well as your rate of return for investments, along with other variables. A retirement calculator can not only answer important questions, if you have all the necessary financial information, but it educates you about the retirement process.

Q: Why is Social Security information important?

A: The Social Security system is designed to supply about 40 percent of the income a person will need in retirement. That makes Social Security one of the three main revenue streams for most workers. The other two are pensions and any investment income. However, there are many nuances in determining Social Security benefits, including when you decide to retire and whether you have a spouse.

Q: What is the difference between 401K and a pension?

A: There is no difference. A 401K plan is one type of pension plan - called a defined contribution plan - that is popular with many employers. With this type of pension plan, the employee contributes a set amount of money toward retirement that is allocated to an investment fund and grows during the worker's lifetime. A defined benefit pension plan lays out a specific retirement benefit for a worker and the employer uses contribution from the company and payroll deductions from the worker to raise the money to provide that defined benefit. Defined benefit plans, however, are costly to companies, who take their contributions and the worker's payroll deductions and invest the money in an investment vehicle. If the investment vehicle doesn't raise enough to pay for the worker's pension, the employer must come up with the difference.