Are you saving enough? Here’s how to build a retirement fund

Highlights

  • A retirement fund is essential for a secure, fun, and peaceful old age.
  • Many employers offer retirement plans for staff to choose from.
  • Accessibility and high returns are key factors for choosing a retirement fund.

Savings are crucial for a peaceful, fun, and secure old age. Likewise, they are critical for your retirement activities. But it requires meticulous planning from early in the career.

Tax-free retirement savings plans could be one of the options. Typically, all pension plans offer tax benefits. So, an employee can start putting a part of their monthly salary into such schemes.

According to a survey of Boston College, 21 percent of Americans don't save for old age, and half of US citizens are not saving enough for retirement. Most importantly, some 50 percent of Americans might not be able to retain their current lifestyle during old age, the survey conducted by the college's Centre for Retirement Research in 2019 found.

Are you saving enough for your retirement?

Fortunately, there are many retirement investment schemes that one can select according to the person's needs. Here are a few.

Defined Contribution

Members contribute a portion of their monthly income into 401(K) and 403(b) plans that are tax-free. More than 85 percent of Fortune 500 companies have adopted the DC plan launched in 1986. The plan’s growing contributors show its popularity.

Under the 401(k) DC plan, one can invest in stocks and other assets. But the amount is taxable even when withdrawn after retirement. Many employers contribute by matching the members' contributions to the plan. However, one drawback is that a penalty is levied if one withdraws the money before maturity, which happens during an emergency.

The 403(b) plan is similar, but charity institutions, public schools, or churches mostly adopt it. The scheme is available for both non-governmental organizations and state and central government employees.

Besides these, another plan called Solo 401(k), also known as ‘One Participant K’, is designed for business owners, self-employed people, and their partners.

According to a survey of Boston College, 21 percent of Americans don't save for old age, and half of US citizens not saving enough for retirement.

Source: Pixabay.

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Traditional Pension

Pension plans are the easiest way to invest as employers fund the plan and provide a monthly fixed income after retirement. However, these plans are not popular as only 14 percent of Fortune 500 companies have embraced them, according to risk management company Willis Towers Watson.

Federal Thrift Savings (FTS)

The FTS is similar to 401(k) but available only to government employees and the armed forces. Employees can select from options like S&P 500 index funds, large-cap index funds, or funds that invest in treasury securities.

Also, employees can select from many lifecycle funds with different target retirement years. Under this plan, employers add five percent of the total investment. But employees must decide how much to invest, based on how much money they would need after retirement.

Cash Value Life Insurance

This plan gives insurance options like universal life, whole life, and variable life. It also gives death benefits, like income, for the relatives. In addition, one also gets tax deferrals on investment growth. But once you subscribe to this policy, you are stuck to it throughout your life. Besides, one will need to study the plan thoroughly, perhaps with an expert’s help because if you don’t do it right, you might end up paying more taxes than needed.

IRA

The US government has created an IRA retirement plan for anybody who works. People can save up to US$6000. But those who are above 50 years can save up to US$7000 annually. In addition, there are various types of IRA like traditional, Roth, Spousal, SEP, and Simple.

Under the IRA plan, the monthly investments are tax-free, and any worker can opt for it. But the amount will be taxable when withdrawing during retirement.

People get substantial tax benefits on Roth IRA. They don’t have to pay tax even during fund withdrawal. S\In addition, a spousal IRA is available to the spouse of the applicant. But the spouse’s taxable income should be more than the contribution made by an IRA holder.

SEP IRA is for business owners and self-employed people. Only employers can set this IRA for all employees. The limit of contribution is 25 percent of compensation or US$57000, whatever is less.

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Guaranteed Income Annuities (GIAs)

Employers don’t offer this retirement plan. Instead, people buy GIAs from the market. As such, people can buy GIAs at any time.

Non-qualified Deferred Compensation (NQDC)

This fund is available only to top company executives. There are two types of NQDC. The first one is like 401(k), in which the employee and the employer put a similar amount in the plan. However, the second one is fully funded by the employer, but the funds are promised later. Hence, it lacks security.

Retirement funds should be transferable when an employee joins another company.

Source: Pixabay.

How to decide on the best retirement plan?

Based on your retirement goal, current income, and responsibilities like kids’ education, you can decide which plan is best suited for you. Expert help to guide you is always advisable as most retirement plans are too complex to understand.

Finally, retirement funds should be transferable when an employee joins another company. They should also give higher returns. For instance, the growth of these retirement funds should not depend on the success of employers. Hence, applicants must know the different retirement schemes available to decide what suits them best.

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