When someone is just starting their career, the last thing on their minds is saving for retirement. That is a mistake. The earlier a person starts planning for retirement, the better off they will be when it’s time to retire.
The Importance of a Retirement Plan
There are numerous retirement investment plans to choose from. This could be one of the most important financial decisions a person can make.
According to SoFi Invest, “Retirement will likely be the biggest expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe, spending time with your grown children and grandkids, or turning your home into a Wild Kingdom of rescue animals.”
Retirement Accounts or Savings Accounts
Today, regular savings accounts pay little interest. A decade ago, you could actually make money in a savings account or buying certificates of deposit (CDs). With interest rates around 0%, there really is no point in a savings account or CD account except as an emergency fund account. Not for a retirement plan.
The Benefits of a Retirement Account
The benefits of a retirement account are that you have more flexibility in what you can invest in. A savings account is basically putting extra money into a savings account and earning the interest. Or buying CDs. Once the CD expires, that money would be used to buy more CDs.
This works well when banks are paying a decent interest rate. But with the current interest rates this low, a person cannot make much money with a savings account.
Right now, dividend-paying stocks are paying considerably more yield than CDs or savings accounts are. Retirement plans can be invested in stocks, bonds, precious metals, and other types of investments.
Most types of retirement plans offer tax advantages. Some companies offer matching plans. Some plans offer stock. These are big advantages over a savings account.
Retirement Investment Plans
There are different types of investment plans for retirement that include:
- Individual Retirement Account or Arrangement (IRA)
- Roth IRA
- 401k Plans
- Simple IRA Plans
- Simplified Employee Pension (SEP) plans are used by the self-employed and small business owner for themselves and employees
- Payroll Deduction IRA
- 457 Plans usually used for local and state government employees
- Payroll Deduction IRAs
- Employee Stock Ownership Plan (ESOPs)
The most popular of these retirement plans are the various 401k plans and the SEP retirement plans. An individual retirement account (IRA) is the most common type of retirement plan. There are two types of IRA, the traditional and the Roth IRA.
Traditional IRA Plans
A traditional IRA has the advantage of possibly lowering the tax bill. The money in a traditional IRA will grow tax-deferred, which can add up over time. During retirement, both the initial investment and the gains are taxed at withdrawal.
Roth IRAs
The Roth IRA retirement money grows tax-free. When a retiree withdraws this money at retirement, it is not taxed. Taxes are paid as with your normal income at the time of investment.
401k Plans
If the company offers a matching 401k plan, employees should take advantage of this. A matching 401k plan means that the employer will match a certain percentage of what the employee invests in their 401k plan each month. Not all companies offer a matching plan, but most offer a 401k, and it is a good idea to participate in this plan. Usually, employees can choose a Roth or traditional type of 401k.
Simplified Employee Plan (SEP)
These plans are excellent for freelancers, the self-employed, and small business owners with fewer than 100 employees. They can reduce the yearly tax bill while saving for retirement.
Which Retirement Plan is Best
The best retirement plan is the plan a person will stick with. When deciding on the best plan, write out the pros and cons of every situation. Will a tax-deferred plan work better, or would you rather pay taxes now and get tax-free withdrawals during retirement.
Company matching 401k plans should always be taken advantage of. Maybe a company offers a pension, with retirement money taken out of the paycheck automatically. That could be the best since it is automated and makes it easy to invest for retirement.
Whichever retirement plan a person decides to use, it is best to start early. Retirement investing plans can be changed at a later date if the situation changes.