Retirement planning is a major responsibility for today’s workforce. As a nation, the United States has largely moved away from corporate pensions and retirement security. Even the average Social Security income is less than adequate for the monthly expenses of many retirees. There is, of course, some good news for the current and future workforce. Individuals preparing for retirement today have unique opportunities that were not available even one decade ago. There are many ways to take advantage of money before retirement.
Types of Retirement Savings Plans
Retirement income generally comes from a combination of sources. Employee retirement plans often include a company match as well as employee contributions. Some employers also feature employee stock options or stock purchase plans that allow company employees to purchase shares of company stock at a discounted price.
Other specific employer sponsored retirement plans are available to select government employees, qualified healthcare workers, and some educators. State and local government agencies, as well as federal divisions, may offer deferred compensation plans. This arrangement allows eligible employees to postpone a portion of their present salary. The general idea behind this retirement savings plan is twofold. It provides additional income after retirement and presumably saves taxes by paying out at a stage in life when an individual has less earned income. These examples represent a few of the most common types of employer sponsored retirement plans. In addition to employer related plans, there are multiple personal retirement savings plans that can help workers prepare for retirement.
Individual Retirement Accounts
Individual Retirement Accounts, commonly known as IRAs are among the most popular ways for workers to save for retirement. As the name indicates, IRAs are not subject to permission or contribution by an employer. Unlike employer sponsored plans, which only offer a pre-selected menu of investment options, IRAs may consist of a variety of different investment selections. Individuals have more control over their investment portfolio when they choose an IRA as one of their investment vehicles.
Mutual funds, company stocks, commodities, and many other investment options are available for savers who want to self-manage their IRAs. There are several different types of IRAs. A traditional, brokerage, or silver backed IRA all have benefits that encourage investors to make regular contributions. Gold and silver are among the most popular precious metals that can be incorporated into an Individual Retirement Account.
Tax Advantages and Implications
The lure of astronomically high growth potential has caused dramatic increases in gold and silver backed IRA opportunities. Physical gold and other precious metals can be rolled over or stored in an IRA, with the help of an experienced broker or financial advisor. Qualified retirement plans have specific tax advantages that make them attractive to investors.
Roth IRAs allow investors to contribute after-tax dollars that will grow tax free over time. The tax savings of an IRA make this type of IRA especially appealing to youngish investors who have the advantage of additional years of growth. Traditional IRAs require tax withholding on earnings at the time of withdrawal or in the tax year that the withdrawal was taken. All qualified IRA contributions are tax deductible in the year that the contribution was made, with some opportunity for carryover. IRA withdrawals before retirement age may be subject to a 10% penalty, unless they are approved under the Safe Harbor guidelines.
Other Retirement Planning Considerations
Individuals saving for retirement must prepare for a number of potential events. IRAs offer autonomy that is not available under employer sponsored plans, but they are subject to annual investment contribution limits. The 2020 limits are $7,000 for investors over age 50 and $6,000 for everyone else. Although these limits typically increase each year, they alone are insufficient to provide adequate retirement income.
Investors will have to determine how they will supplement their income during retirement. If the savings from employer sponsored and individual plans are not going to provide enough income for a retirement lifestyle, retirees may need to consider working at least part-time during retirement.
The overall goal for retirement planning is to start as early as possible and take advantage of all the opportunities available. Catch-up contributions for those over age 50 help make retirement a reality. Investors are encouraged to choose suitable investments for their retirement planning needs.