What Are Retirement Programs?
Retirement programs are savings programs designed to help you save money for your future so you can live off of your savings in lieu of working. Retirement plans include 401(k) plans, IRAs, pension plans and annuity policies. Make sure that you understand how these types of plans work before investing in them.
Other People Are Reading
-
Types
-
401(k) plans are employer-sponsored plans. These plans are part of your employer's benefits package. You invest in a 401(k) plan by having your employer deduct money from your paycheck. The employer then sends this money to your 401(k) account. IRAs are individual retirement accounts. You deposit money into these plans from your bank account and, depending on the nature of the IRA, deduct the contribution from your taxes at the end of the year. Pensions are retirement plans are set up by your employer. Your employer contributes money to your pension. When you retire, the employer pays you a retirement income for the rest of your life or for a set number of years. An annuity policy is a private insurance contract to which you contribute. Money is invested into a fixed interest account or in mutual funds. Money is then paid out to you for a set number of years, or for your entire life, on a guaranteed basis.
Significance
-
The significance of retirement plans is that they are savings plans specifically designed to help you acquire and accumulate funds that will be used to support you in your old age. You may not be able to work, and these plans will provide a financial safety net so that you do not have to rely solely on Social Security or generous family members or friends to survive.
-
Benefit
-
The benefit of retirement plans is that they all offer some kind of deferment on the payment of taxes. By deferring taxes on investment earnings inside of the retirement plan, your retirement savings is allowed to grow and compound over time without interference. This, in turn, gives you more savings to live off than if you had not used a retirement plan.
Disadvantage
-
The disadvantage to a retirement program is that the funds are earmarked for retirement. In all cases,the IRS designates a minimum age that you must attain before money may be used for retirement purposes. This age is set at 59.5, as of 2010. Money used before this age is generally subject to a penalty of 10 percent.
Considerations
-
When considering which type of retirement plan to use, carefully weigh what each plan offers. For example, 401(k) plans may provide a matching contribution from your employer, IRAs provide investment flexibility that you may not have in a 401(k) plan and annuities do not have the contribution limits that 401(k) and IRA plans are saddled with. Though many companies do not offer pensions anymore, pensions provide you with income that is given to you by your employer so that your need for personal savings is reduced.
-
