Your guide to retirement plans
This article was written for informational purposes only and should not be construed as legal, financial, tax, or any other kind of advice.
Your retirement may seem like it’s a long time away, but it’s never too early to start contributing to your retirement savings. Did you know that up to 53% of people currently working don’t think they’ll have enough money when they retire?
There isn't just one type of retirement plan. The option you choose will depend on your employment, income, and age. You can even use a combination of investment options to make sure your future is financially secure.
With so many different retirement plans, which one is right for you? To help you decide, we've put together this guide.
We’ll compare retirement plans and tell you about where you can invest your money:
What is a retirement plan?
At some point, you'll want to quit your job and retire. But you'll still have living expenses such as housing costs, healthcare, food, and utilities.
During your working life, you'll have opportunities to contribute to your retirement. There are a number of plans available, including savings incentives, match plans, stock ownership plans, annuities, mutual funds, and cash balance plans.
You can access these retirement plans when you eventually give up work to enjoy your senior years. The funds should help you live comfortably even without a full-time job.
If you don't have enough savings, you may be eligible for social security benefits.
Retirement plans can have tax benefits. For example, if you have a 401(k) plan, your contributions will come from your pre-tax income. This can lower the amount of tax you have to pay during your time in the workforce.
The added tax breaks are just one of the reasons people look for this employee benefit.
Why should you care about your retirement?
The cost of living can be high, and your expenses won't disappear just because you retire. And, when you give up your day job, you'll have more time to do the things you enjoy.
For example, retirees often like to travel, take up new hobbies, and spend time with grandchildren. To fund your lifestyle, you'll need enough money to support your needs.
But what should your retirement income be? The answer depends on your individual circumstances. Most experts suggest that you'll need between 70% and 80% of your current annual salary for each year of retirement.
If you're self-employed or unsure about your investment choices, you should speak to a financial advisor.
Types of retirement plans you should consider
The retirement plans you choose will depend on your eligibility. And your age, position, goals, and salary are important factors to consider before you start saving.
Let's take a look at some of the most common retirement savings plans:
A common retirement plan option offered by employers is the 401(k) plan. When you take advantage of this employer's plan, you can set aside a percentage of your salary for retirement.
The money will automatically come out of your wages each time you get paid. You'll have a choice of where to invest your money.
Employer matching is a perk your company may offer. If you have this benefit, they'll match a percentage of your personal contributions.
These employer contributions will have a set limit, and this can vary between employers.
If you have a traditional 401(k) plan, your retirement savings will come from pre-tax dollars. But you'll have to pay income tax on the withdrawal amount when you retire. If you have a high income now and expect a lower retirement income, this will be a tax advantage.
For those with significant retirement savings, a Roth 401(k) plan may be a better option. You can pay taxes on your contributions now, and when you withdraw your funds in retirement, they'll be tax-free.
Solo 401(k) plan
If you're self-employed, you won't have access to a company's 401(k) plan. Instead, you can contribute to a Solo 401(k) plan.
This has similar rules to a traditional 401(k) plan, but self-employed individuals can't have anyone working for them. However, the plan will cover your spouse.
The IRS has strict contribution limits each year, and for 2022, the maximum is $61,000. If you're over fifty, you can add an extra $6,500 as catch-up contributions.
Just like an employer 401(k) plan, you have two tax options. You can pay tax on your salary deferrals with a Roth Solo 401(k), or your contributions can be tax-free until you withdraw them in the future.
If you work for a tax-exempt organization, government agency, nonprofit church, or public school, you may be offered a 403(b) plan.
It's similar to a 401(k) plan, but you'll usually have more investment options to choose from. Your contributions are taken from your regular salary and put into an investment fund.
Some employers support you by matching contributions, but it's not common.
You'll be able to contribute up to $20,500 per year to this retirement plan. This contribution limit is the same as a 401(k) plan.
Unlike the 401(k), if you've been working at the organization for more than fifteen years, you may be eligible for a higher contribution limit.
You can choose to use pre-tax income or post-tax income for your 403(b) retirement benefit.
An IRA (Individual Retirement Account) is another option for your retirement savings. As long as you have an income, you can open this type of account.
Banks, credit unions, investment agencies, brokerage firms, and personal brokers may offer IRA plans. All plans need to be approved by the IRS.
There are a range of IRA plans to choose from depending on your personal circumstances. The list includes traditional IRAs, SEP IRAs, SIMPLE IRAs, and Roth IRAs. Traditional IRAS are the most common.
A SEP (Simplified Employee Pension) IRA is for employers who want to grow your retirement fund on your behalf. You won't be able to contribute yourself.
If you have a SIMPLE (Savings Incentive Match Plan for Employees) IRA, it's a tax-deferred benefit.
Small business owners who want to contribute to their employees' retirement and their own will often choose a SIMPLE IRA. You can also make your own contributions.
Your IRA contributions will be tax-deductible, and there are limits on how much you can contribute each year. Even if you already have an employer-sponsored 401(k) plan, you may still be able to open an IRA.
Social Security plan
When you work, you pay taxes, and part of your taxes go towards Social Security. Throughout your working life, you'll receive credits. If you get at least forty credits, you'll be eligible for a Social Security benefit when you retire.
It takes around ten years to earn forty credits, and you need to have worked near your retirement. If you've had time off and gone back to work, you'll be able to add to the total of your credits.
And if your husband or wife passes away, you can claim their Social Security benefits.
The average Social Security retirement benefit is $1,657 per month. Depending on your situation, the maximum you can receive is $3,345 per month.
Your monthly payments will go up for every year that you delay retirement.
If your employer offers a profit-sharing plan, it can help boost your retirement income.
Depending on the way the plan is structured, you'll get extra income when the company is profitable.
Each reporting period, you may receive a payment based on company profit. You may receive this payment immediately or when you retire.
These profits are on top of your usual salary and bonuses. Your employer may also offer an employee stock ownership plan.
Cash balance plan
A cash balance plan is a type of defined contribution plan. When you retire, you'll receive a lifetime annuity - a set amount paid at regular intervals throughout your retirement.
This option is low risk for employees as the balance and interest are guaranteed. Unlike other plans, your balance won't fluctuate. This is because you're not relying on the performance of your investments.
Employer contributions to your cash balance plan are usually tax-deductible.
FERS (Federal Employees Retirement System) is a retirement plan for those who work for the US Government.
Depending on your eligibility, you can get a Basic Benefit pension plan, Social Security, and a Thrift Savings Plan (TSP). The Basic Benefit plan is exclusive to government workers.
You'll need to contribute a percentage of your income, and the agency will also pay a share. You'll have to pay taxes in the short term, but there will be no additional taxation requirements when you retire.
Once you reach retirement age, your FERS pension will be paid as a lifetime annuity.
A Health Savings Account (HSA) is a savings account that can be used for unexpected health care expenses. Some employers offer this benefit as part of a broader health benefits package. Or you can take out a personal HSA.
There's a catch. To be eligible, you'll need a high-deductible health plan (HDHP). And you'll need to be under retirement age.
The money you contribute to this account is tax-free, and if you use it for eligible health expenses, you'll never have to pay tax. This reduces your tax liability, leaving you with more money each pay.
The funds roll over each year, so you'll never lose these savings. You can use your HSA to pay for healthcare costs in your retirement. So you can save your retirement funds for your other expenses.
Where else can you invest your money?
If you're serious about saving for your future, there are other strategies you can use to grow your bank balance.
For those with a home, paying off your mortgage before you retire means there'll be one less expense to worry about. And, you can think about purchasing an investment property.
If you have a flair for DIY and real-estate know-how, you can buy a fixer-upper and renovate it for a higher price. When you retire, you can downsize and boost your retirement income with your profits.
Other options include stocks and shares and high-yield savings accounts. Remember, some investments are high risk, so you should get financial advice before handing over your hard-earned income.
Some people find other ways to make extra money when they retire. Your options will depend on your skills and experience.
For example, you could teach piano, start a dog walking service, or babysit children in your neighborhood.
What is the retirement age in the US?
The average retirement age in the US is 62 years of age. But the FRA (full retirement age) is 67 if you're born after 1960. It's 66 if you're born before 1955.
If you retire before the FRA, your early withdrawal can come with a 10% penalty.
Don't forget, if you don't have a Roth plan, the money you withdraw during your retirement will be taxable income. But the rules can vary between local government areas.
If you keep the average retirement age in mind, it'll help you budget for your future.
Where to find a job with a good retirement plan
Your retirement plan will usually come with a suite of other employee benefits, including health insurance, dental insurance, and life insurance.
These benefits are usually available to full-time employees. Some part-time employees can also get employee perks.
When you apply for a new job, you can check the job description to see what's on offer. And the employer will usually give you more details during the job interview.
If you're ready to look for work, you can start your search on our job board.
Saving for your future
If you want to save for your future, you'll need to plan ahead. There are a range of retirement plans to choose from, and the option you choose will depend on where you work, how much you make, and how old you are.
Your employer may have plans available with options for employee contributions. And there are government pensions and profit-sharing plans.
Some of the most common retirement plans are IRAs, 401(k) plans, 403(b) plans, and Solo 401(k) plans.
A good financial advisor helped me. Right now my money is making more than my take home pay. Put your money to work, it's like having two incomes doing one job.Ford
This is very informative. Thanks again.