Introduction
Many investors believe that saving for
retirement officially starts when you open a retirement account. In reality,
however, retirement savings start when you begin to accumulate equity. Until
you have equity, you have nothing. Equity is the quotable market value of
one’s assets, less any associated debt. Assets are anything that can be
monetized into cash. Investing in real estate, for example, is saving for
retirement. Many individuals have multiple properties generating a positive
cash flow. Equity accumulates as the mortgages are paid down and property
values increase. Some individuals live in oversize homes, with the intent of
building equity, while enjoying their savings. When retired, they down size
to a less expensive home and live off the difference as a retirement fund.
There is no right or wrong way to build equity. Small business owners, for
instance, often buy the building instead of renting space. The building
then becomes their retirement nest egg when it is paid off. Savings in the
form of precious stones and metals is also acceptable, if you know how to
convert these assets into cash. Collectables and personable property,
however, are not retirement savings. Enjoy them for what they are.
Typically, these are not reliable sources of equity, and would only be
counted as savings when they are converted into cash; not one second before.
Any equity that can be converted to cash is savings, to be used as one sees
fit, including retirement. All your equity, however, should not be tied up
in your house. You need both a place to live and a cash flow to supplement
social security in retirement. Pensions and retirement accounts are the
“main stream” methods of providing a cash flow, when you are no longer able
to work.
Company sponsored
pension plans, while greatly diminished over the past few decades, still
exist in some business enterprises. As firms downsize pension plans, they
usually switch over to company matching 401(k) plans, giving employees
greater control over their retirement assets. Employees should only consider
pensions or 401(k) plans as equity, when the balances are vested.
Additionally, uncertainties exist until one’s pension is both vested and
funded. It’s not unheard of to get laid off immediately before being vested
or a company going out of business and unable to pay its future pension
commitments.
To protect its elderly
citizens and to promote saving and investing, the government established tax
incentives for certain savings and investment accounts. These, primarily
retirement accounts, are intended to help maintain adequate living
conditions for individuals in their twilight years. Retirement accounts are
protected under the law and contain rules, restrictions, and other
safeguards to help ensure that financial assets are available upon
retirement.
While retirement plans
are normally invested in financial assets, there are no guarantees that
these assets will maintain their worth in the future. Depressions,
recessions and business failures happen; the value of financial assets can
change quickly, and in some cases, can evaporate overnight.
For the
purpose of this website, we are discussing tax deferred retirement and
savings accounts. IRAs are personal retirement accounts, while 401(k)s are
business retirement accounts. Contributions drive the tax benefits, while
withdrawals mainly trigger any tax liability.
