Unless you plan on working forever, at some point you will be retiring. Planning for retirement can help ensure that you have enough money to cover any expenses once the income stops coming in.
401(k) and 403(b)
Many employers offer retirement savings plans for their employees, most commonly a 401k or 403b plan, though there are others, as well. For more information about the specific types of plans, check out: The Bogleheads'Retirement Plans Overview.
With employer-sponsored programs, money is automatically taken from your paycheck and deposited into the retirement fund. This makes saving easy and painless, since you never see that money. This money is usually taken out of your paycheck before taxes are taken out, maximizing your investment. And at the end of the year, the amount you put into your retirement fund may be tax deductible, as well (see your tax preparer for more specific information).
Some employers will also offer matching, which means that if you put money in your retirement fund, so will they. If your employer offers matching, it will usually match either dollar for dollar or 50 percent of your investment up to a certain amount. If you have questions about your employer's retirement plans, and whether or not they offer matching, talk to someone in human resources to get more information.
Many employers will offer different options for your fund. For those who want to take a greater risk, there are options that rely more on stocks. For those who are a bit more cautious, or don't have the time to take a big risk, there are more conservative options, as well. When you sign up for your plan, you will be asked to choose how you want your money invested. Consider your personality and how much time you have before you'll be retiring. Would you feel comfortable losing your investment if a stock tanks? Would you rather have a smaller, but more likely, gain? Bigger risks may equal bigger gains, but they also may equal bigger losses. Think about how you would feel in both circumstances.
If your employer doesn't offer a retirement plan, or if you want to save for retirement through a personal account, too, you can open an IRA. There are many different types of IRAs, but the most popular are a traditional IRA or a Roth IRA.
- Traditional IRA: Contributions made to a traditional IRA are tax-deductible. This means that the amount you put into your IRA is deducted from your income before determining your taxes. When you take the money out of your retirement fund, you must then pay taxes on this "income."
- Roth IRA: Contributions made to a Roth IRA are not tax-deductible. You pay taxes on the amount you put into your Roth IRA. However, when you take the money out of your retirement fund, you don't have to pay additional taxes.
Many banks and investment houses offer IRAs. Shop around to find a company that makes you comfortable, offers choices that work for your goals, and has a good reputation and track record. Don't go by just promises – see how well they've done for others. Get referrals from people you know and look at customer feedback to get actual input. A simple search online will also bring up others' opinions on different banks, investment options and types of accounts.
As with employer-based retirement funds, IRAs offer options for your investment. Whether you want to take a greater risk or play it safe, the bank that you end up selecting will offer different choices.
With IRAs, you must be 59 ½ years old to withdraw from your account without penalty. In cases of extreme hardship, you may be able to take a loan against or withdraw funds from your account, but keep in mind that money you take out won't be there when you retire. The purpose of a retirement fund is to build funds to live on when you stop working. Taking money out of the fund defeats this purpose.
For more information on IRAs, visit: