Planning for Retirement

There comes a point in everyone’s life where they will stop working.  For most people it will be at the end of their career, when they are simply too tired to keep up with the daily grind.  Retirement is something for which a worker should actively plan.  Since social security was only designed to cover a portion of retirement expenses, there are many tax advantaged ways to save in order to have a long, comfortable retirement.

Employer Plans

Many employers sponsor a plan that their employees can participate in.  The most common is the 401(k).  Beginning in the 1980’s, as employers were getting rid of the defined benefit plans and opting for a defined contribution plan, American workers have been investing in their future with 401(k)’s.  These plans generally have a match (1% to 6% is most common), are relatively low cost to run and maintain, and offer a wide variety of fund choices for the investor.  For anyone who has this type of plan, that offers a match, they need to make sure they are contributing at least enough to take advantage of the employer’s contribution.  Otherwise, they are simply leaving money behind.

Some small employers choose to stay away from the 401(k) plans, and stick with the Savings Incentive Match Plan for Employees (SIMPLE) IRA.  These plans function in nearly the same manner as a 401(k) in that employers offer a match and contributions are automatically deducted from their paycheck.  The biggest difference is that these plans often have no maintenance fees, aside from those within the investments and are thus cheaper to maintain.

There are some other plans that a worker will run across, but these two will cover the majority of all available plans.  Nearly every employer offers something, for the employee who is not taking advantage of them, they are missing out.  Remember, all contributions to an employer plan (as long as it is not a Roth option) are tax deductible.

Individual Plans

There are two main types of retirement plans that an individual can set up.  They are the Traditional IRA, and the Roth IRA.  The differences between the two have already been discussed, but it is important to note that these plans can be maintained alongside an employer sponsored plan.  They have their own contribution limits that are completely separate from the limits on the employer sponsored plan.  While a person can contribute to both a Traditional and a Roth IRA, the contribution limit ($5,000, plus $1,000 catch up for those over 50 years old, for 2012) applies to all deposits; it is not per account.

For those who do not qualify to contribute to an IRA there is an alternative.  While the tax advantages are not as great, putting money away in an annuity will provide two perks.  The first is that gains will not be taxed until the money is removed.   The second is that rebalancing will not trigger a taxable event.  While the fees in an annuity are often higher than in an individual account, the advantages make it a great option for those who have either maxed out their retirement accounts, or do not qualify for them.

There will be a point in everyone’s life where they either choose not to work anymore, or they simply cannot work anymore.  If they have planned for retirement using the best pension plans available, they will be able to enjoy some of the finer aspects of their golden years.  Those who did not plan or set anything aside will end up having just bare necessities covered by their social security checks.

Image Credit