For many young Americans, turning thirty represents a huge milestone; as people begin to live longer, the time that we’re “allowed” by society to remain footloose and fancy free has begun to extend well into our twenties. But alas, this prolonged adolescence can’t last forever. As we Millennials begin to approach age thirty, the pressure to get our lives in order starts to get dialed up. So if your days as a twenty-something are numbered, seriously think about taking these three important financial steps as soon as you can.
Planning for retirement is essential for a seamless transition to life after the workforce. A recent study by the Hongkong and Shanghai Banking Corporation (HSBC) found that people who planed for retirement had five times the assets of those who didn’t.
Need Help Planning for Retirement? There’s an App for That!
As technology advances in the 21st century continue to improve our everyday life, from Apple’s invention of the portable digital music player (iPod) to the Word Lens app that allows you to translate foreign language by pointing your smartphone or iPad at foreign text and reading the English text on your device – it was only a matter of time until a retirement app was invented.
The Quick Advice app estimates the monthly income you can expect throughout retirement by using your current age, preferred retirement age, annual salary, and other annual income information. While this app is of great assistance to people who are beginning to plan for their future, it’s more important to understand what type of retirement plan will best help you reach your retirement goals.
There are various types of retirement plans to choose from to help you reach your post-workforce goals. One of the more popular options is an Individual Retirement Arrangement (IRA). The two different types of IRAs include:
- Traditional IRA – Donations made to your traditional IRA may be partially or fully deductible and earnings and gains made are not taxed until the money is distributed.
- Roth IRA - As long as the requirements are satisfied, the money you’ll receive from your Roth IRA will be tax free. You can contribute to your Roth IRA until you are 70 years old, however, your account or annuity must be designated as a Roth IRA when it is set up.
IRA-based plans offered by most employers include:
- Payroll Deduction IRAs
- Simplified Employee Pension (SEP)
- Salary Reduction Simplified Employee Pension (SARSEP)
- Savings Incentive Match Plans for Employees (SIMPLE IRA)
Types of Retirement Options
Retirement options have grown exponentially since the days of the standard 401(k) plans in which some employers match employee contributions on a dollar-for-dollar basis. Today, employees can pick from more than 17 retirement options to plan a financially stable life after the workforce. Some of these retirement options include:
- Profit Sharing Plans – Profit sharing plans require no set amount for contributions and can be held in addition to other retirement alternatives.
- Defined Benefit Plans – The amount of workers who pick the defined benefit plan package has declined from 114,000 insured plans in 1985 to a mere 38,000 insured plans today according to the Pension Benefit Corporation. This drop can be attributed to extremely low numbers of use in companies who provide this retirement option. Nonetheless, people who use this plan benefit from higher contributions from employers than other retirement options.
- Money Purchase Plans – This type of retirement plan requires mandatory contribution from the employer. However, it has been reported that this type of plan discriminates against employees who earn lower wages at a company because the plan pays a higher percentage to highly compensated employees.
- Employee Stock Ownership Plans (ESOP)– An ESOP, 401(a), is a stock bonus plan designed to give staff members shares in the company they work for as part of their salary. This is an equity-based deferred compensation plan in which employees become owners of stock in the company they work for. Typically, companies allow employees the opportunity to acquire the company’s shares at a reduced price over a period of time.
- 403(b) – The 403(b) tax-sheltered annuity plan is a tax-advantaged retirement plan similar to the 401(k), but which is available for public education organizations, some non-profit employers, and some self-employed ministers in the United States. Salary designated to go into a 403(b) are made before income tax is paid and grows untaxed until the money is withdrawn from the plan. At some companies Roth contributions also go toward 403(b) funds and can be withdrawn tax-free. However, Roth contributions have to be in the plan for at least five taxable years.
Social Security is a social insurance program that provides protection against poverty, old age, disability and unemployment to name a few. While this program helps ease the financial burden during retirement, stock options remain a better way to have a more secure retirement. However, the best stock options are usually reserved for the top leaders of a company.
Therefore, planning and saving for retirement is still the key to unlocking financial freedom throughout your retirement. Pick a retirement plan and contribute to the fund, and you will surely thank yourself in the future.
There are many options out there to get your retirement plan going or growing. Take time to meet with your employer and financial planner to determine which plan works best for you.