Well, it will be here before you know it. How will you budget for it? Do you know how much to save for it? How are you going to use it?
No, not holiday shopping (although that is right around the corner, too). Your retirement! It’s coming faster than you think and if you have been avoiding it because you’re not sure where to start, let’s start with some basics about retirement plans.
Workplace Retirement Plans
Many employers offer retirement plans, and hopefully yours is one of them. There are usually two types available. Some are defined benefit plans and others are defined contribution plans. What’s the difference?
Defined benefit plans are employer contributed and company administrated plans for which the company entirely controls your investment risk and portfolio management. This means that the company selects an investment firm or package that will make all of the investment decisions for you.
Once you retire, a formula is used to calculate your retirement income. The formula takes into account the age at retirement, your wage or salary, and the length of time you were employed with the company. The benefit of this type of package is that you will receive a set amount in retirement income to work with.
With defined contribution plans, the employees contribute some or all of the funds into the package and make decisions on how to invest the money. Plans such as these may include employee stock ownership, money purchase plans, profit-sharing plans and stock bonuses.
The most common defined contribution plan is a 401(k). With a 401(k), money is contributed from an employee’s paycheck before taxes. So, the more you contribute, the lower your taxable income will be. However, once you start withdrawing funds from your 401(k), taxes will be applied.
Two great benefits of 401(k)s are that many times employers offer matching contributions for certain amounts, and they are considered portable.
Individual Retirement Arrangements (IRAs)
But what if these options are not available for you? Maybe you are self-employed or working in a job that does not offer retirement plans. If so, here are some IRA options you can look into.
Though both Traditional IRAs and Roth IRAs allow the same maximum annual contributions based on your age to a retirement savings account, they are significantly different in other ways.
For example, with a Traditional IRA, your money is tax deductible, and as with contributions to a 401(k) described above, you will only pay taxes on the money once you start withdrawing it as retirement income. However, when you contribute to a Roth IRA, the funds are taxed at the time of contribution and are tax-free when you withdraw them. Other differences include income limits; withdrawal restrictions; and limits based on whether or not you also contribute to an employee retirement plan.
Beyond these basics are many other ways to save for retirement as well as Social Security retirement guidelines to consider. If you are unfamiliar with retirement plans and not sure what is best for you, contact Linden Oak Wealth Partners. We would be happy to help you make your retirement investment work for you.
Linden Oak Wealth Partners offers fee-only financial advising customized for women, in particular, women in transition. Our goal is to create an environment where financial planning is efficient, simplified and easy to understand. We want clients to feel empowered and engaged every step of the way. Please contact us to schedule an initial consultation today.
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