The question may cause you to shudder: how’s your retirement planning going? Maybe you’ve saved for an emergency fund or set aside other cash. But, one of the most important types of savings is retirement planning, even if you’re not planning to retire early. Beginning to save for retirement early is important because of compounding interest. Consider that, after twenty years, your savings could triple in value.
Although the concept of retirement planning is simple, there is a lot of variation in the types of retirement funds available depending on your work situation and where you live.
Social pension options
Many countries have some form of a public pension option, referred to as “non-contributory” or “social” pensions. If you live in the United States, for example, public retirement is covered through Social Security. Over the course of a worker’s career, the employee and employer both contribute 6.2% of the employee’s earnings to Social Security. Once the worker turns 66, they are eligible to begin receiving benefits.
In other countries like Canada, public pensions are paid for by the Government’s general tax revenues. In Latin America, social pensions are also common. Bolivia, for example, offers an essentially universal pension funded by government enterprises, although the amount received may be adjusted according to how much a person receives from a personal retirement account.
On the other hand, in Chile, government sponsored pensions are a bit more complex. Workers have a mandatory “defined-contribution” pension through the government through which a percentage of the worker’s wages each month is paid to one of six for-profit funds that they can begin receiving benefits from after the age of 60-65.
Although many people, regardless of where they live, qualify for some form of a social pension, it is not advisable to rely solelyon public pensions because they are often very modest in payout amounts.
What are my individual retirement options?
Given the unreliable nature of social pensions, it can be a good idea to save for retirement through an individual account. Your options will depend upon where you live, but most countries offer some form of a private defined-contribution plan.
In the US, the 401(k) is the most common private retirement fund and is provided through an employer. However, making payments is entirely optional. You can choose to allocate a part of your paycheck to your retirement account and some employers will match a pre-defined portion of your contributions.
This can be problematic, however, because many people underestimate how much they should be saving for retirement. The rule of thumb is that you should try to save the entire amount that your employer will match.
Many countries offer similar employer-matched retirement accounts, referred to as “contributory” pensions. In Sweden, for example, workers and employers are required to pay 2.5% of workers’ wages to an individual retirement account that is managed by the Swedish Pensions Agency.
Similarly, in the UK, workers are automatically enrolled in a retirement account with a minimum 8% contribution by employees and 3% by employers. If you do not live in one of these countries, you should talk with your employer to see what retirement options might be available to you. If you are ineligible for a retirement account through your employer, you can meet with a financial advisor or local bank to explore your options.
Regardless of where you live, there are certain characteristics universal in individual retirement accounts. Most countries set minimum age limits for when you can begin to withdraw money from your retirement savings, usually around the age of 65-67. If you try to withdraw funds early, you might face a hefty fee or receive reduced benefits.
On the other hand, if you wait to retire a few years, the government might increase your payout. Additionally, you should be aware that there are often limits on how much you can contribute per year, so it’s a good idea to get started early. To read about country-specific retirement programs, you can visit the Organization for Economic Cooperation and Development (OECD).
What is an IRA?
An IRA is an individual retirement account. When it comes to retirement planning, IRAs are typically more important than 401(k) plans for self-employed earners or small businesses. Just like 401(k) plans, IRAs have maximum contribution limits and a minimum age required to access funds that were contributed to the account.
Similar to 401(k) plans, in Roth IRAs, taxes are levied on contributions as they are deposited, but not when they’re withdrawn. If you are self-employed or work for a company that doesn’t offer a 401(k) benefit, an IRA may be a great retirement planning option for you.
What about pension plans?
A pension plan is another form of retirement planning which is generally built into an employer’s benefit package. There are two types of pension plans: a defined contribution plan and a defined benefit plan.
Typically, a defined contribution plan might be an alternative to a 401(k) in the public sector. Much like a 401(k), the end result of pension payments after retirement depends on how the investment performs long term. Conversely, a defined-benefit pension plan guarantees an employee a certain amount of income after retirement.
Defined-benefit pensions can be expensive for employers if the investments perform poorly over the lifetime of a fund. These are also popular retirement planning options amongst public service employees.
What does retirement planning mean for you?
These retirement planning methods involve setting money aside to help provide for expenses after your working life is over. Depending on your profession, your income, and where you live, your options will vary. For example, if you’re self-employed, it’s wise to discuss an individual retirement account with a trusted financial adviser.
If you’re employed by a larger company, it’s smart to spend some time discussing the different options for retirement planning with your employer. If you haven’t begun working yet, keep in mind that it’s wise to consider the retirement plan potential employers offer before accepting a job offer!
Remember, it’s never too early to begin saving for retirement. You will thank yourself later!
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