Retirement isn’t something that we think of often when we’re young, but with employee pension plans and hefty Social Security payments now becoming a thing of the past, it has to be. No matter your age, it’s never too early to consider what the best retirement plans might be for you and to get started on putting away your pennies for old age.
There are many types of retirement plans to choose from and each has its distinct advantages and disadvantages.
Just as there are many types of workers, it’s important to find the type of plan that’s specifically suited to your needs, so that you can make smart investment choices and have enough money to live comfortably on when you retire.
We’ve compared six of the best retirement funds available in the US and what these savings vehicles comprise of.
By understanding who they best suit, the pros and cons they offer, and how you can start one for yourself, you’ll be fully prepared for old age and ready to retire with enough money to enjoy your golden years comfortably.
If you’d like to see a graphical breakdown of the retirement plans, we got you covered:
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6 of the Best Retirement Plans to Consider
You might have asked yourself briefly what is the best retirement plan for me, but a quick look at all of the options probably overwhelmed you.
We’ve made the decision simple with six options for personal retirement plans that are most popular with a straightforward review on what they’re all about.
A 401k is by far the most common retirement plan people choose and as an employer sponsored savings plan, this can be set up with your workplace.
The 401k works by taking a set amount of money out of your paycheck or salary and placing it in a separate account.
The funds in this account are used to invest in various options like stocks and bonds, and hopefully accrue interest for you over the years.
The main benefit of these defined contribution plans is that you’re able to make contributions with pre-tax earnings.
Whatever you put away to the savings account won’t be taxed as income, therefore giving you less tax to pay when you do your yearly returns.
Some employers with the best 401k plans offer matching contributions which mean they’ll put money into your 401k account as you do, so you’re effectively earning free cash.
There are some negatives to consider with these types of retirement accounts, and it mainly has to do your personal responsibility.
The risk is entirely on you with how much you put away and what investment options you choose, so you have to be sure it’s going to be adequate for retirement. Not understanding how these work can have a very negative impact so you need to do your research.
If you want to withdraw money from your 401k before retirement, you’ll be hit with some penalties. Tax will also need to be paid when you finally do withdraw, regardless of whether it’s early or after the retirement date.
This is a great preventative measure to stop people from accessing their retirement funds. Most people are then happy to leave their nest egg right where it is and not touch their 401k account until the right time.
There are four types of IRA plans available and these are considered some of the biggest when it comes to retirement options.
You’re able to set up your own IRA with a financial institution or individual broker and they give you a lot of freedom all around.
There are limits on how much you can contribute each year but the different types of IRAs available all have their own stipulations on this and the tax involved.
The main benefit of using an IRA is that they offer you more flexibility for how you want to invest your money and how much you want to put aside.
There are a lot more investment choices and you also get to decide where a tax break will benefit you most.
Some people have both a traditional and Roth IRA which means they can contribute to both and save yourself a lot of money where tax is concerned.
There are negatives to consider is that the annual contributions are capped a lot lower than a 401(k) and they’re based on your gross income.
In 2019, the IRA limit was $6,000 per year compared to $19,000 in a 401(k). When you start to earn over $122,000 as a single income earner, this cap lowers even more.
These are the four types of IRA accounts you can have, and depending on
your circumstances there’s likely to be one that’s the perfect fit:
- Traditional: As deductions are made, your annual income lowers which makes you eligible for less tax paid.
- Roth: Tax is paid as you make contributions and you won’t be taxed when you decide to take the money out.
- Spousal: Suited to people who have a nonworking spouse so they’re able to get retirement savings with certain tax advantages.
- Rollover: This occurs when you are moving money from a previous employer’s 401(k) to get control of your cash, but there are limits on when you can access it.
A Roth IRA is usually the most popular choice for people who decide to go with an IRA, but you have to be sure that your tax bracket during retirement is going to be higher than it is now when you’re working.
Therefore, planning an IRA requires a lot more thought than a 401(k) even if you’ll benefit down the line from not paying taxes when you’re ready to withdraw.
Pensions/Defined Benefits Plans
There was a time when the pension was the most common way to save for
retirement. These plans are fully funded by your employer who gives you a
monthly figure once you retire. The most standard formula is around 1.5 percent
of final compensation then multiplied by how many years you worked for the
company, paid monthly.
A pension or defined benefit plan is calculated based on both your years of service and salary, so they will differ for each job.
It’s rare to find employers these days that offer them and as they were started to phase out, most people switched to a 401k instead. However, if you’re able to find a company that offers them they can be extremely valuable, provided you are planning to stay for the long term.
The benefits of a pension are that they’re pretty self-sufficient and there’s very little required of you to organize it because it’s done through an employer.
You’ll be given a set amount of money when you retire and this will be the same each month so it’s easy to budget for, and the money will never run out so you’ll continue earning benefits until you die.
However, these plans are less common and it’s been found that only 16 percent of the biggest Fortune 500 companies even offer pensions any more.
These plans are also calculated on your years of service to the company, so unless you plan on staying there for your entire working career you won’t get the full benefits.
Pensions can be extremely valuable when they work the right way and if you’ve put in many years of service for a company.
As they’re rare to find though it’s not usually a viable option for the long term because it’s hard to guarantee, and most financial advisors would recommend supplementing with another retirement plan alongside a defined benefit scheme.
A simplified employee pension plan or SEP IRA works just like a standard IRA, only it’s for self-employed people or small business owners and employees.
A SEP IRA works instead of a trust fund and the employer puts contributions into this plan instead.
The limits for contribution in 2019 were capped at $56,000 or 25 percent of compensation, so it can be a bit more confusing to figure out for additional employees.
The best thing about using a SEP IRA for employees of small business is that you won’t pay any fees to use this type of account.
For the self-employed or business owners, you’re able to make contributions that are much higher than standard 401ks or IRAs so you can put away quite a sizable chunk of your money.
A huge bonus for employers is that any contributions they make will be tax deductible, which is another great way to save money.
On the downside, you’re able to get access to your money a lot easier when it’s stored in a SEP IRA.
While this might sound like a benefit it actually makes it harder to abstain from taking money out of your retirement fund. Additionally, there’s no real way to tell how much you’ll make with this type of savings plan so it makes future financial planning very hard to do.
If you’re a sole proprietor, you’ll be better off using a solo 401(k) account instead because the contribution limits are higher.
A SEP IRA still comes with the regular tax that other savings plans do, and if you withdraw early you’ll be faced with a 10 percent penalty usually.
You won’t be able to make catch up contributions but these accounts are a lot easier to set up, so they can be especially attractive to sole contractors and small business owners.
Overall, this is a smart choice for the self-employed provided they put some thought into contributions.
Federal Government Plan
Employees of the federal government make up a large portion of the US workforce and as such, they have their own retirement plan to consider.
Federal government plans are made up of three separate entities, including a simple defined benefit plan, Thrift Savings Plan, and social security. If you end up leaving your job, you can transfer the TSP and Social Security only.
The biggest benefit of these plans is how much your employer, the government, will match. Usually, they offer a dollar for dollar contribution match on your savings if you contribute 5 percent.
Additionally, the investment fees are a lot lower than you’ll find with private companies’ investment plans, so you’re able to get even further value for your money.
There are negatives to consider of course, with the main one being this type of plan only works if you’re a federal government employee.
There’s no way to tell how much you’ll be left with at retirement and there’s quite a bit to figure out to ensure you’re getting the most from the plan. Contributing at least 5 percent is recommended in order to get the matching contributions so it only works for people with that much to spare.
The most important part of a federal government plan is the Thrift Savings Plan, which is often compared to a 401(k) plan but only better.
You’re able to select from five different investment choice and choose a targeted retirement date for each one, so it’s pretty specific about how you manage your investments. Options include bond funds, small-cap funds, and international stock funds, so they’re pretty diverse.
If you are a federal government employee, this seems like the best approach.
Provided you are able to take advantage of the matching bonus and keep your employment for the long term, the three different options provided to you in these types of plans will be very beneficial when you finally do decide to retire.
Guaranteed Income Annuities
Although not offered by employers as one of the types of retirement accounts you can choose, these can be set up individually.
A GIC is one of the best retirement investment plans for financially savvy people or those with assistance, and it means you’re able to swap a lump sum at retirement to purchase an annuity.
This means you’ll receive a monthly payment for life in exchange for that final sum of money.
The benefit of this type of plan is that it’s paid for life, so even if you live well beyond your expected years, you’ll always have the money to rely on.
You can choose a deferred income annuity that is paid even later, and every time you make a payment to the premium, it will increase your final figure.
However, these retirement plans are confusing and they require a lot of leg work on your behalf.
It can be scary to trade in a huge lump sum that you’ve saved and swap it for smaller yet regular payments, so it’s not ideal for everyone.
For people who aren’t sure when their exact retirement date will be, it’s not a smart option because you’ll be essentially locked into the agreement.
A GIC means you get a set amount of money each month, so even if your investments have done well you won’t see an increase.
They can be purchased with after-tax earnings or you can use the funds in your IRA to get them, which will benefit you with a tax deduction.
Although complex and only suited to a small group of retirees, they can be very satisfying if done right.
Beginner’s Introduction to Retirement Plans
Life was a lot easier when our employers had pensions in place for us, but today we must take matters into our own hands with a personal retirement plan.
Luckily, we have a lot of options to choose from and many of these plans can be customized to suit our specific needs, so you now get more say than ever about how to save for retirement.
A retirement plan is put in place for you to access when you finally retire and you want to be sure there’s enough money in there to live comfortably.
Most of these plans allow access to your money without penalties at 59.5 years of age, and with the average life expectancy in the US 78.6 years, you’ll need enough for at least 20 years of expenses.
Rather than having a separate savings account that we’re responsible for, these plans take a lot of the thought out of saving.
With regular amounts coming out each month or week you won’t notice it at all until it comes time to retire and you’re greeted with a hefty sum of money to live off.
The earlier we can commit to a retirement plan the better off we’ll be, so anyone in the workforce should have an understanding of what their personal plan is.
Whether you opt for the traditional 401(k) or want something more tailored to your financial situation, starting early and adding funds from a young age will pay off exponentially when you finally do retire, so it’s worth looking into no matter how old you are.
Common Retirement Plans
Retirement plans can be confusing, and for that reason alone many people put off organizing theirs.
We’ve got the answers to some frequently asked questions about retirement plans to help make it a little less confusing so you can finally decide on the right savings vehicle for you.
Offer Retirement Plans?
Most larger financial institutions offer retirement plans, including 401k accounts, that their customers can choose to apply for.
Some people may prefer to source their own plan rather than taking what is offered by their employer, but it’s important to understand what that specific plan is offering before you commit.
How Do You
Start A Retirement Account?
Retirement accounts that are employer-sponsored can be organized through your workplace.
If you choose not to go through your employer or are self-employed, you can apply through a bank or financial institution, speak to a financial planner, or speak directly to a retirement savings plan provider.
Better Than IRA?
IRA and 401k accounts both differ slightly, and their advantages might be more appealing to certain types of people than others.
A 401k account has higher annual contributions but a Roth IRA can be withdrawn at any time without paying taxes, as they’ve already been paid.
No one choice is better than the other and it will depend on your specific circumstances to find the right solution.
A Pension Or 401k?
Pensions and 401k are two popular methods for retirement plans, with the main difference being that pensions are a defined benefit plan and 401ks are a defined contribution plan.
A pension will pay out regular payments once you retire until you die, whereas a 401k account can be accessed after retirement as needed.
Retirement Plans Work?
Retirement plans use your own money to create a savings fund for your retirement.
Usually, your employer is responsible for taking the money out of your regular paycheck and placing it into this account, with the money then being used for various investments.
When you retire, you can access the money as you see fit and will have a larger balance than what you initially put aside each pay.
Savvy Planning Now For Your Retirement
It’s easy to not think about old age when you’re young and employed, but it’s not a thought that should be avoided.
You can easily set up a retirement plan at any age and make sure it’s earning money for your golden years, and once you’ve done the initial groundwork you won’t have to give it a second thought.
With most employers not offering pensions any longer and Social Security payments not being enough to rely upon alone, it’s crucial to have a personal retirement plan in place.
Any of these plans that we’ve reviewed have something worthwhile to offer for your financial future, and you can easily organize one in minutes to be rewarded with a steady income well after you retire