Back in the 1970s, Congress put a plan to save money for the working class by establishing a tax-subsidized retirement program. With this people could set aside a certain amount of money every year without paying tax on the money and continue doing so until they retire.
Today, whether you work for a large company, small business, run your own venture or work as a freelancer, you probably have access to some kind of tax-free savings plan.
You are likely to have access to a 401k plan or IRA. This information talks about the benefits of having such a plan and what you can expect during retirement out of these savings.
Table of Contents
1. A retirement plan can save you on tax
The main principle governing all of these tax savings strategies is straightforward. Uncle Sam decided not to tax the money that you are setting aside for retirement purpose in a retirement account, even for the accumulated interest and earnings.
So, by the end of say 30 years, the money you have saved may have grown not just due to interest but interest on the interest itself, known as compound interest. The case in point is when the money compounds, it can add to your savings substantially over the period of a long time.
2. A retirement plan to replace social security income
There is another reason to start saving for retirement through 401K or IRA plan. The Social Security Administration predicts that at the rate people are saving and the income paid to baby boomers and other retirees, unless Congress agrees to a drastic measure for overhaul by the year 2034, the fund to pay full benefits might deplete.
Additionally, even if the social security benefits program stays around during your retirement years, you may not be able to survive solely on that income.
The predicted number on your social security report that your parents and grandparents once enjoyed will be history. You may have to depend on other sources of income to get by.
For this and many other reasons, saving for retirement is absolutely essential.
3. Retirement savings can grow significantly
Your money in the retirement plan doesn’t have to sit there collecting dust. You can channel it into investments such as stocks, mutual funds, CDs and bonds.
You can decide how you want to divide that money given the various choices available through your plan management company or brokerage account.
Many plans offer a choice of about 20 or more investment venues. Every time you contribute, you can choose from one or more of these options, which might include shares from individual forms, index funds, balanced mutual funds or international funds.
With the IRA plan, you have limited options. Note that, once you contribute to these plans, they are locked away meaning if you opt to withdraw any of the funds before you retire, you will have to pay a stiff penalty. Once matured, you can withdraw all of it just like life insurance endowment policy or save it for future use.
4. Employers often match your contribution
One of the biggest benefits of a retirement savings plan is the opportunity to have your employers contribute to the fund. Most employers will match a portion of the amount you contribute to your retirement account each year.
A growing number of companies today encourage their employees to take part in some sort of retirement program.
By contributing the maximum amount that you are allowed for a particular year, you are taking the full advantage of this amazing deal. Again, note that some companies will automatically increase their contribution year after year, so that is an added bonus for having a retirement plan in place.
5. Retirement plans offer low-cost options
Generally speaking, with a retirement plan, your money is exposed to a wide range of investment choices. The trick here is to go for the lowest cost available fund. The good news is that your brokerage account will tell upfront how much the cost to manage a particular fund will be.
Employers are obligated to keep the expenses related to retirement savings as low as possible. If the fees are higher or the expense is greater, the amount of money that you will earn will be less.
So, if your list doesn’t show a low-cost index fund among other things, ask the administrator to provide one.
For long term benefits, make sure to choose the right plan according to your needs and budget. Avoid taking out a loan from these accounts, but if you have to withdraw, pay it all back within a specified time-frame to avoid tax or penalty.
Saving through a retirement plan is a really good idea as you are deferring tax while beating inflation at the same time. Even if it doesn’t make you rich overnight, it can pave the way for a comfortable retirement.
Alex is fascinated with “understanding” people. It’s actually what drives everything he does. He believes in a thoughtful exploration of how you shape your thoughts, experience of the world.