Retirement Program

Retirement program options are vast, and there is a plan available to suit almost everyone. Retirement should be a milestone to look forward to, but many people nearing retirement age are anxious about their financial futures. Inflation and an unstable economy may have had a drastic effect on how much you will need to retire versus what you originally planned for. Having a retirement program in place early on can alleviate the financial burden that comes with retiring, and most working people are already covered by one or more program.

The four retirement program categories are government-sponsored plans, personal plans, annuities and employer-sponsored plans. The largest government-sponsored program is Social Security, a federal social insurance plan. All workers pay into Social Security through payroll taxes throughout their working years. When they come of age, dependent on their year of birth, seniors are able to draw benefits for all of their later-life expenses. All workers who have been paying income tax have also been enrolled in Social Security, and this retirement program is guaranteed for them.

The other retirement program options are more variable, and workers must take the initiative to invest in them. The keys to making a retirement plan work is to start saving early, save aggressively and resist tapping the account early. High-risk, high-return investments can lead to great pay-days if they are given plenty of time to grow. Seniors with less than a decade before retiring should stick to safer, moderate to modest-return investments.

Personal Plans and Annuities

A personal plan for retirement refers to an interest-bearing account for which you are the sole beneficiary, the most popular of which is an Individual Retirement Arrangement, or IRA. There are various types of IRA differentiated according to their tax treatments. Roth IRAs are the most beneficial to the account-holder from a taxation standpoint, and these are recommended for people who are many decades away from retiring. Contributions to traditional IRAs are often tax-deductible, making later-life savings an attractive option, but withdrawals are considered taxable income. SEP IRAs and SIMPLE IRAs allow employers to contribute or match contributions to the account.

A life annuity is an agreement with an insurance provider or other financial institution that follows the basic principles of insurance. The annuitant makes a lump sum payment or a series of regular payments to the issuer (the accumulation phase), who then dedicates future payments to the annuitant (the distribution phase). Annuities can make payments in fixed amounts or payments that increase by a fixed percentage or in payments that vary based on the performance of certain investments like bonds and mutual funds. Fixed and variable annuities receive different tax treatment, with variable annuities being tax-deferred until a withdrawal is made.

Employer Sponsored Plans

A retirement program sponsored by an employer is managed by the employer and falls under one of two categories: qualified or non-qualified. Qualified plans are more common because they are tax-beneficial to the employer. The two primary types of qualified retirement plans are defined benefit plans and defined contribution plans.

With a qualified program, like a pension, the employee is paid benefits upon retiring based on salary history and years of service. The employers bears a high investment risk, and the employer, employee or both can contribute to the program. There is an annual cap on contributions: the smaller of either $160,000 or average compensation from the three highest consecutive earning years. These are recommended for people with less than 20 years before retiring to maximize their contributing potential.

A subcategory of defined benefit plans is pensions. A pension is a specific amount paid out to the employee upon retiring. The amount is based on years of service and salary history, and many companies require a certain number of years of employment before establishing a pension program. Pensions are non-transferable, so if an employee leave his job, he leaves the pension with it.

The other employer-sponsored retirement program is defined contribution plans. The employer and/or employee can make contributions up to 25 percent of the participant's total compensation. These are not government-backed, so the participant's investment decisions determine the final benefit. There are numerous forms of defined contribution plans.

With profit sharing plans, the employer is the sole contributor, and the amount is based on the participant's current compensation. A form of profit sharing is a stock bonus program whereby contributions are made in the form of company stock. Money purchase pension plans bind the employer to making a mandatory contribution of a fixed percentage of the employee's salary. These can be combined with profit sharing plans for companies that earn variable profits each year.

With a thrift retirement program, the employer can match all or a percentage of the participant's contributions. A 401(k) is a variation of this. Ask your employer about establishing a retirement program early to maximize your benefits.

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