For many young professionals who are only beginning their careers, retirement could be the very last thing on their list of priorities. Understandably, they just had a taste of responsibility and financial freedom, so of course, they aren’t too excited about planning for the future.
But that could be their first mistake. In reality, it’s never too early to plan for retirement, especially because building a substantial retirement fund takes time. If you want to have a steady source of income and maintain a certain quality of life in retirement, this is what you have to do.
Besides, planning for retirement doesn’t mean that you can’t live in the now. It just means that you will be actively participating in preparing your future finances so that you won’t have to worry about where you’ll get your income when you can no longer work for a living.
For starters, you can learn about the different retirement plans and how they compare to one another. This will provide you with enough pros and cons for each option, which you can use to help you decide the right plan for you. In fact, here are three retirement plans you can consider:
The 401(k) is a defined contribution retirement scheme that allows employees to contribute to an investment account. It’s an employer-sponsored retirement plan like pensions, but the main difference between the two is that 401(k)s are more flexible and can be rolled over to other accounts.
With a 401(k), you can contribute as much money as you like, provided you don’t exceed the annual contribution limits. You will also have the freedom to choose where you’ll invest your money, such as in mutual and index funds, bonds, or stock options. This is something that you can’t do with a pension plan.
Keep in mind that having a 401(k) puts the investment and longevity risk on you instead of your employer. This means that you will have the power to choose your own investment options, but the burden of choosing the wrong ones will also fall on your shoulders.
Traditionally, pensions are the preferred retirement plan option for many employees and employers. A pension is a defined benefit plan that provides a specific payment amount in retirement, which is funded and managed completely by the employer.
This means that if your employer is offering pensions as retirement plans, they will keep making contributions on your behalf as long as you’re working for the company. Once you retire, you’ll be able to receive regular payments, but those are dependent on the number of years you’ve worked in the company and how much you earned over time.
One of the biggest downsides to pensions is that they aren’t portable. If you decide to leave your current company, for instance, it might be difficult or somewhat impossible to transfer the money in your pension to another account, unlike the 401(k) or even an IRA.
The upside, however, is that the pensions can provide retired employees with a fixed monthly income for life. They also have the option to take their pension in lump-sum distribution instead of the traditional monthly income, but that isn’t free of repercussions. So, you should weigh your options properly.
Unlike the 401(k) and pension, the individual retirement account (IRA) is not an employer-sponsored retirement plan. Rather, it’s a tax-free savings account wherein you can invest your money in stocks, bonds, and other assets to build a nest egg for your retirement.
Anyone with earned income can open an IRA and make tax-advantaged contributions to save money for their future. There are two common types of IRAs — traditional and Roth. The traditional IRA is a good option if you think that your tax rate will decrease in the future.
However, if you believe that your tax rate will increase while in retirement, then a Roth IRA would be the more practical option for you. This is because your money will be able to grow tax-free, and you won’t be taxed if you make any withdrawals during your retirement period.
Retirement planning can occur at any time during your professional life, but it could be better for you to get a head start on the matter. This doesn’t mean that you should start planning for your future from the moment you receive your very first pay check, but you should at least start learning about your options.
So do your homework; take a look at each retirement plan’s advantages and disadvantages. This way, you can make an informed decision about your future finances and how you can earn your living without worrying about whether you’ll have food on the table until you retire.