How to Fund Your Own Pension
Many people find themselves in positions where they either have no employer-sponsored pension plan, or they feel they need to create their own to supplement the pension plans they already have. There are many different ways to build a pension plan of your own, including an IRA, SEP-IRA, Roth IRA, 401(k) and simple savings and investment. Whether you choose one or several retirement account types, the most important part of building your own pension fund is budgeting your money so you can make regular contributions to your pension account.
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Instructions
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Prepare a list of your monthly expenses such as mortgage or rent, car payment, insurance, medical expenses, gasoline, utilities, food, entertainment, personal expenses and miscellaneous expenses. This gives you a picture of how money flows through your bank account and helps to pinpoint areas where you can cut back spending to provide a monthly retirement fund deposit.
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Create a budget based on the spending decisions you made so you have a comfortable and reasonable amount to set aside each month for your pension. If it is a very comfortable amount, it may not be large enough to build an adequate pension fund. That is why it is important to budget a reasonably large amount that you can also easily put away each month.
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Contact your bank to find out what services they offer that you might find helpful. Your bank may be able to automatically transfer a set amount of money out of your checking account into a savings account weekly or monthly. You can also make your retirement fund contribution when you sit down to pay your bills. Either way, strive for a simple solution that will reliably result in regular monthly contributions.
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Investigate the types of pension fund accounts by contacting your bank, brokerage house, mutual fund and insurance company to see what retirement accounts they offer. An IRA, or individual retirement account, allows you to contribute a certain amount per year, or slightly more if you are over 50, and take that amount as a deduction from you income for tax purposes. However, you will have to pay tax on the income you withdraw from the IRA after you retire. The allowable amounts change frequently, so check with the Internal Revenue Service for the latest contribution limits.
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Ask about a SEP (simplified employee pension), also known as a SEP-IRA, if you are self-employed. These accounts allow you to contribute a percentage of your business earnings, up to a cap, each year on a pre-tax basis. Again, the allowed contributions change frequently. A 401(k) can also be used if you are self-employed, and it allows for larger contributions. The drawback is it also requires more paperwork on your part.
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Pay attention to fees charged for the different types of accounts. Your goal is to find the least expensive, most convenient retirement account that meets your retirement saving goals, so it will be helpful to make a list comparing the fees and features of each account so you can have a good overview to help you choose the best service offered.
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Decide whether you want your investments managed by a professional investment manager, as in a mutual fund, or whether you want to self-direct your account, managing your own investments. If you have no investing experience, a mutual fund is probably your best choice.
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Select an administrator for your retirement account. Banks, brokerage firms, mutual funds and insurance companies offer such accounts and act as administrators. All that is left to do after selecting a retirement account service is to open the account and start contributing.
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Tips & Warnings
Most people think seriously about setting up a first or additional retirement account at least once a year. However, many people don't take their intentions all the way into reality. If you want to set up a retirement account, start by ordering your bank to automatically transfer money from your checking account to a savings account. That way, while you are deciding on which type of retirement account suits you best, your money will be accumulating. With a chunk of money waiting for you to make up your mind, you will have an incentive to complete your plan to set up your pension fund.
When you create your budget, do not overestimate your ability to set aside money. If you set your goals too high, you may find it impossible to make a full contribution each month and this may lead you to skipping monthly contributions altogether. It's better to plan to set aside a small amount that is easy to keep up, and add extra money when you have it, than to set yourself up for failure by planning for a large monthly contribution.
References
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