A Comparison of Retirement Funds
Saving for retirement can be a long and complex process, with employers, banks and the federal government offering several different investment options. Investing in retirement funds is even more complicated since it's impossible to predict exactly how much money you'll need to maintain your lifestyle once you stop receiving a regular paycheck. Each type of retirement fund has its own benefits and drawbacks that can help determine which options are best for you.
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Types
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Most workers have several options for investing in retirement funds. A 401k fund is among the most common. Employers sponsor the funds, which employees can then contribute up to 25 percent of their salaries (or up to $30,000) into each year. Employers can also choose to match employee contributions as an added benefit. IRA funds, or Individual Retirement Accounts, are tax shelter accounts that allow workers to contribute money before taxes and withdraw it once they retire. Keogh funds are for self-employed workers who contribute before taxes and can also dictate how they want the money in the fund invested, such as into the stock market or in mutual funds.
Function
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Retirement funds rely on the fact that contributors will be able to wait until retirement before they need to access the money in the fund. This means that fund managers can invest the money into stocks, bonds or mutual funds based on how soon fund owners will make withdrawals. For example, a fund with a high number of younger contributors might go into more risky long-term investments, while a fund that has owners who will need the money shortly, might prompt the managers to make safer bets when investing and growing the money.
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Benefits
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The primary benefit of any retirement fund is the money it sets aside for paying your living expenses during retirement. In the case of 401k plans, employees can earn extra money for retirement when an employer matches their contributions. In addition, the IRS allows you to deduct some or all of the amount you contribute to a retirement account from your taxable income, meaning you won't have to pay tax on that income until you start drawing from the account. This can mean even more savings if your income during retirement places you in a lower tax bracket than you were in while working.
Drawbacks
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Retirement funds all involve setting money aside to use later. Workers who save extensively for retirement may find themselves with more income than they need late in life at the cost of frugal living earlier. Retirement funds based on investments can lose value if the stocks or bonds they include show a loss, which can make putting additional money into a retirement fund during a period of economic decline a costly decision.
Alternatives
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Retirement funds are a key element to retirement living, but other sources of income may affect how much you need to rely on them. Employee pensions are another major source of income. They vary based on your length of service and income level during employment, as well as your employer's retirement policies. Social security income is available to anyone over age 67 who worked in a job that earned social security benefits. Finally, personal savings or investments can make up the difference between retirement income and the true cost of retirement living.
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