Traditional retirement planning involves a number of different investment and saving avenues that cater to different types of individuals with different long term goals. From social security benefits and 401 (k) plans to government pension plans and real estate options, the ideas involved with planning for retirement can often be overbearing for a family.
Before committing to one retirement plan, it's best to way the pros and cons of each one to determine a good fit for you and your family.
Retirement Preparation: The Individual Retirement Account (IRA)
An IRA is a very popular retirement account. The federal government allows you to invest up to a specific amount each year tax free. That means that any gains achieved during the course of its investments are not taxed. You only pay taxes on an IRA account when you withdraw from it during your retirement years.
An IRA account is one of the most effective ways to save for retirement. Your money grows year after year, and you do not have to pay taxes until you withdraw it.
People who contribute to their IRA accounts can also deduct that amount from their income tax returns in April.
If you attempt to withdraw money before the age of 60, you'll likely have to pay an early distribution fee of 10 percent plus any applicable taxes.
A 401 (k) Account
A 401 (k) account is an investment account that is normally set up on behalf of your employer, however, you can set one up through most major financial institutions.
Similar to an IRA account, a 401 (k) account allows you to contribute up to a certain amount every year, usually deducted from your paycheck on a pre-tax basis. Your employer will often match this amount with a percentage out of its own pocket.
You may enjoy a significant more when you retire from a 401 (k) account, because the investment vehicles are of greater risk. Employers also match 401 (k) percentages up to a certain amount, allowing you to save more for retirement.
You have a greater risk of losing more money because the investments are riskier. You are also charged a penalty if you wish to take a loan from your 401 (k) or you want to withdraw it altogether.
Government Retirement Accounts
If you work for any type of government entity, you'll likely enjoy a decent retirement. Similar to a 401 (k) and IRA, retirement accounts are invested in a number of different vehicles. The average return for something like this is around 6 percent every year, especially when the market is good.
People who work for the government usually retire much earlier than other professions. Many accounts are sought after less than 10 years, which means, you can work for the agency for a total of 10 years to enjoy at least partial benefits when you reach a specific age.
Government-backed retirement accounts are also much more secure than other accounts.
Government retirement accounts do not allow you to withdraw any cash for a loan, like other accounts do. You have to wait until you leave the company completely or retire in order to receive any of the money you have saved up.
Planning for retirement can often be a stressful task. If you already have a retirement account set up, considering adding a new business to your retirement preparation. A business venture can be built up over time and can provide great financial rewards once the time has come to hang up your hat.