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contributions are not deductible from income, but are tax free on distribution. Contributions to a Traditional IRA are deductible from income and earnings are tax deferred . IRAs may not be drawn on until age 59 ½ , etc
Other Sources: Savings, Home Equity and Inheritance Personal Savings. Traditionally, personal savings have been a source of retirement income that people tap into to make up the shortfall between what Social Security and Medicare provide in order to live comfortably. Unfortunately, the rate at which Americans save has declined and is at an all time low. Unless you buck this trend, you may not have enough to make up your retirement income shortfall. Periodically review and renew your Personal Savings Habit Pledge . The amount you have available in savings and investments can make a big difference in your quality of life in retirement. Reverse Mortgage. In the last chapter, we learned that homeownership can make a big difference in the ability to retire comfortably. A home with a mortgage that has been paid off provides a low cost place to live. Do you know that equity is also a source of wealth that can be tapped for funding retirement? A reverse mortgage is a financial arrangement whereby a homeowner borrows against the equity in their home. Instead of paying monthly mortgage payments to the bank, the homeowner gets tax free money every month from the bank. In exchange, the bank gets a security interest in the home which increases each month. When the homeowner dies and the home is sold by the person who inherits it, the loan is repaid through the sales proceeds. Although it steadily diminishes a homeowner’s equity, a reverse mortgage can provide much-needed financial relief for an 80 year old running low on money. Inheritance. You know that old couple driving down the street with the bumper sticker that reads “We’re spending our kids’ inheritance!”? They probably are. People are living longer. As a result they’re using up their wealth which means there’s less to pass on when they die. It’s not impossible that at some point in your life you’ll come into an inheritance. Even a small inheritance is a great source of money to be saved and invested for retirement. IV. 21st Century Challenges For many generations before yours, funding a comfortable and secure retirement has been based on the traditional triple-play combination of Social Security benefits, pension plan payments, and personal savings. Between those three sources, a retiree could usually cobble together 75-85% of their pre-retirement income to live comfortably. Things have changed in the 21st century, and not for the better. Your generation is at a higher risk of living in poverty or having to substantially reduce your standard of living than generations before you. In fact, you face serious challenges to funding even a moderately comfortable retirement. Let’s find out about those challenges and what you can do to avoid suffering the fate of the underfunded retiree: Life Expectancy. Life expectancies are increasing. Nowadays, a 65-year-old man has a 41% chance of living to age 85 and a 20% chance of living to age 90. A 65-year-old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90. While living longer, healthier lives is great, it also comes with some challenges. PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 181
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