retirement plan
Introduction
A retirement plan is a financial arrangement designed to replace income earned from employment when someone retires (Costo, 2006). Over recent years, there has been a rise in retirement. Short (2002) observed that the labor force participation rate of younger men aged 55-64 years has declined. She noted that a more significant number of people would spend their lives in retirement considering raising life expectancy. With the government developing the social security program, retirement has become feasible for many. There are two types of retirement plans, namely defined benefit, and defined contribution plans. The defined benefit plan offers a specific monthly advantage when one reaches retirement age, whereas a defined contribution plan does not promise a specific amount of benefits at retirement (Dvorak & Hanley, 2010). Some of the successful retirement plans in the US are; profit-sharing plans, Guaranteed Income Annuities, Pensions, IRA, 401(K), and 403(b) plans (Clark et al., 2011). This paper will compare some of the retirement plans, and advice on the best strategy a person earning $40,000 annually can take to make $ 3 million at 60 years.
403B and 401K
The 403B and 401k retirement plans were named after the tax code-501(c) (3) that established them. 403B and 401K plans share a wide range of differences. For eligibility, 403B covers employees working at educational and non-profit organizations whereas the 401K covers any employee above 21 years. For the contribution limits, an employee with 15 years of service is eligible to contribute an additional $ 3,000 in 403B. In the 401K plan, an employee cannot defer any additional amount other than the $ 6,500. Based on deductions and deferrals, the employees’ contributions are Pre-taxed, and the tax-deferred in the 403B plan while in 401K plan the employer’s contributions are deducted to the employer. 403B scheme uses mutual funds and annuities investment options only, whereas the 401K allows any investment option available.
The two retirement plans are similar in some ways. The programs offer fundamental contribution limits. They provide Roth options and require participants to reach the age of 59.5 years before taking their benefits. Again, the two retirement plans are subject to the Employee Retirement Income Security Act (ERISA). Both are tested by the ADP and ACP (Phillips and Fred, 2012).
Pension and Annuities
The pension plan refers to accounts that an employee funds over time through the use of contributions deducted from the employer’s pay. An example is the 401K plan. Pension Benefits Guaranty Corporation (PBGC) is responsible for ensuring pension plans. Annuities are insurance contracts that someone signs insurance professionals to enjoy a set of income on retirement. An employee pays for the Annuity over a given period of time. The pension and annuities have differences. The amount received from Pension gets determined by the amount earned during service whereas the amount received in Annuity gets determined by the amount an individual invests in a given period. Individuals obtain the financial benefits only on retirement while those enrolled with Annuity can receive finances anytime they are willing to get them. The employer’s pensions are offered to the employees whereas annuities are offered by insurance companies to any willing individual. The pension schemes allow an individual to transfer theIntroduction
Retirement plan is a financial arrangement that is designed to replace income earned from employment when someone retires (Costo, 2006). Over the recent years, there has been a rise of retirement. Short (2002) observed that the labor force participation rate of younger men aged 55-64 years has been declining. She noted that a larger number of people will spend their lives in retirement considering the raising life expectancy. With the government developing the social security program, retirement has become feasible for many. There are two types of retirement plans namely defined benefit and defined contribution plans. The defined benefit plan offers a specific monthly benefit when one reaches retirement age whereas defined contribution plan does not promise a specific amount of benefits at retirement (Dvorak & Hanley, 2010). Some of popular retirements in the US are; profit sharing plans, Guaranteed Income annuities, Pensions, IRA, 401(K), and 403(b) plans (Clark et al., 2011). This paper will compare some of the retirement plans, and advice on the best plan a person earning $40,000 annually can take to make $ 3 million at 60 years.
403B and 401K
The 403B and 401k retirement plans were named after the tax code-501(c) (3) that established them. 403B and 401K plans share a wide range of differences. For the eligibility of employees, the 403B covers those working in educational and non-profit organizations while the 401K covers any employee above 21 years. For the contribution limits, an employee with 15 years of service is eligible to contribute an additional $ 3,000 in 403B whereas in 401K plan, an employee cannot defer any additional amount other than the $ 6,500. In the basis of deductions and deferrals, the employees contributions are Pre-taxed and the tax diferred in 403B plan while in 401K plan the, employer’s contributions are deducted to the employer. 403B plan uses mutual funds and annuities investment options only whereas the 401K allows any investment option available.
The two retirement plans are similar in some ways. The plans offer basic contribution limits. They provide Roth options as well as requiring participants to reach the age of 59.5 years before taking their benefits. Again, the two retirement plans are subject to the Employee Retirement Income Security Act (ERISA). This means that they are both tested by the ADP and ACP (Phillips and Fred, 2012).
Pension and Annuities
The pension plan refers to accounts that an employee funds over time through the use of contributions deducted from their pay by the employer.an example is the 401K plan. Pension Benefits Guaranty Corporation (PBGC) is responsible for insuring pension plans. Annuities are insurance contracts that someone signs insurance professional so as to enjoy a set of income on retirement. An employee pays for the annuity over given period of time. The pension and annuities have differences. The amount received from pension is determined by the amount earned during service whereas the amount received in annuity is determined by the amount an individual invests in a given period of time. Individuals receive the financial benefits only on retirement while those enrolled with annuity can receive finances anytime they are willing to get them. The pensions are offered by the employer to the employees whereas annuities are offered by insurance companies to any willing individual. The pension schemes allow an individual to transfer their pension funds to family member in case of death. For the Annuity, money cannot be transferred to any other person. One has a clear control of their money in annuity than in pension retirement plan. Annuities may incur additional fees and commissions especially when the insurance companies invest the money in stock markets. Pensions on the other hand are easy to handle. The contributions and account management are automatically taken care of by the employer. Hence, the employee has zero responsibilities. However, the lack of control over the account by employee may cause one to lose significant value of savings (Clark et al., 2017).
IRA and 401K
Individual Retirement Account (IRA) is retirement plan that individuals acquire from financial institutions. There are different types of IRA plans namely, Traditional, Roth, SEP and SIMPLE. To facilitate IRA, an employee opens an account with a financial institution. Money is added to the accounts every year by the employee. The account owner is allowed to invest the money to bonds to make more money. One of the best IRA plan is the Roth. It allows a larger investment selection with tax free withdrawals in retirement. The Roth IRA enables withdrawal of contributions anytime without any penalty. Regardless of the flexible nature of IRA, it has several cons. The contribution limits are low as compared to that of 401K. Minimum distribution starts at the age of 72 years as opposed in 401K. Again, the eligibility of acquiring 401K is not limited by income as compared to the IRA (Plan, 2016).
Estate planning
Estate planning involves planning of how individual’s property and finances will be managed and distributed in case they die. This is achieved through the establishment of trust accounts that can benefit, selecting and identifying an executor who will ensure transfer of assets to beneficiaries, setting up a power of the Attorney and updating beneficiary about the retirement plans. Estate planning involves many steps to check on taxes. Firstly, an individual has to set an AB trust to enable the spouse to benefit from the money invested. Secondly, an estate planner may decide to give to charitable organizations to reduce taxable estate to lower the estate tax bill. Thirdly, estate freezing is done to limit death taxes. The individual’s present value is locked as the future growth is transferred to the spouse or any other beneficiary. Finally, life insurance is used to pay for any liable taxes as well as pay expenses, and fund retirement plans. To execute estate planning, a Will is used (Ball, 2015).
Factors considered when selecting retirement plan
Before settling up for retirement plans, there are important factors that should be considered. These include; the cost of living during retirement, debts, income, living arrangements, social interaction, and estate planning (Dulebohn, 2002). The cost of living that one wants to live after the retirement should be used to determine what amount one saves. If a higher luxurious lifestyle is chosen, retirements plans that will help pool more cash should be selected and vice versa. When choosing the retirement plan, efforts should be made to ensure that debts are not incurred when paying for the plans. This will reduce chances of bankruptcy. The amount of income one earns should be considered. Retirement plan selected should not be hard to pay for without any struggles. Social interaction should be considered to ensure loneliness is avoided during retirement period. This means one should check on the beneficiaries covered by the retirement plans such as the family. Finally, estate planning is critical. An individual should determine what will happen to their assets and finances when they pass on. This will ensure that key beneficiaries left behind benefit.
Choose one retirement options
The employee has more than 35 years to work and save. In order to achieve a $3 million in her retirement account, the employee should choose the 401K and Roth IRA retirement plans. Assuming her employer offers the 401K, she should put more money to get maximum match. With a 100% match, she will enjoy higher returns from the investment. Assuming the employers agrees to match up to 3% of the salary; it means she will contribute $1200. With this match, she can then invest in Roth IRA for a year and then return to the 401K plan to further resume contributions. By the use of the 401K and Roth IRA, she will be able to achieve her target retirement amount.
Conclusion
The life expectancy for Americans is rising. The young people are targeting early retirement. Therefore, it is important to make a wise choice when selecting retirement plans. Setting out life goals after retirement offers a better approach to determination of suitable retirement plans. Choosing a combination of retirement plans will help achieve higher financial outcomes. Quoting George Foreman, “The question isn’t at what age I want to retire, it’s at what income.” oice ”’_’ir pension funds to family member in case of death. For the Annuity, money cannot be transferred to any other person. One has a clear control of their money in Annuity than in pension retirement plan. Annuities may incur additional fees and commissions especially when the insurance companies invest the money in stock markets. Pensions on the other hand are easy to handle. The contributions and account management are automatically taken care of by the employer. Hence, the employee has zero responsibilities. However, employees’ lack of control over the account may cause one to lose the significant value of savings (Clark et al., 2017).
IRA and 401K
Individual Retirement Account (IRA) is a retirement plan that individuals acquire from financial institutions. There are different types of IRA plans, namely, Traditional, Roth, SEP, and SIMPLE. To facilitate the IRA, an employee opens an account with a financial institution. Money is added to the reports every year by the employee. The account owner is allowed to invest the money to bonds to make more money. One of the best IRA plan is the Roth. It allows a larger investment selection with tax free withdrawals in retirement. The Roth IRA enables withdrawal of contributions anytime without any penalty. Regardless of the flexible nature of IRA, it has several cons. The contribution limits are low as compared to that of 401K. Minimum distribution starts at the age of 72 years as opposed in 401K. Again, the eligibility of acquiring 401K is not limited by income as compared to the IRA (Plan, 2016).
Estate planning
Estate planning involves planning of how individual’s property and finances will be managed and distributed in case they die. This is achieved through the establishment of trust accounts that can benefit, selecting and identifying an executor who will ensure transfer of assets to beneficiaries, setting up a power of the Attorney and updating beneficiary about the retirement plans. Estate planning involves many steps to check on taxes. Firstly, an individual has to set an AB trust to enable the spouse to benefit from the money invested. Secondly, an estate planner may decide to give to charitable organizations to reduce taxable estate to lower the estate tax bill. Thirdly, estate freezing is done to limit death taxes. The individual’s present value is locked as the future growth is transferred to the spouse or any other beneficiary. Finally, life insurance is used to pay for any liable taxes as well as pay expenses, and fund retirement plans. To execute estate planning, a Will is used (Ball, 2015).
Factors considered when selecting retirement plan
Before settling up for retirement plans, there are important factors that should be considered. These include; the cost of living during retirement, debts, income, living arrangements, social interaction, and estate planning (Dulebohn, 2002). The cost of living that one wants to live after the retirement should be used to determine what amount one saves. If a higher luxurious lifestyle is chosen, retirements plans that will help pool more cash should be selected and vice versa. When choosing the retirement plan, efforts should be made to ensure that debts are not incurred when paying for the plans. This will reduce chances of bankruptcy. The amount of income one earns should be considered. Retirement plan selected should not be hard to pay for without any struggles. Social interaction should be considered to ensure loneliness is avoided during retirement period. This means one should check on the beneficiaries covered by the retirement plans such as the family. Finally, estate planning is critical. An individual should determine what will happen to their assets and finances when they pass on. This will ensure that key beneficiaries left behind benefit.
Choose one retirement options
The employee has more than 35 years to work and save. In order to achieve a $3 million in her retirement account, the employee should choose the 401K and Roth IRA retirement plans. Assuming her employer offers the 401K, she should put more money to get maximum match. With a 100% match, she will enjoy higher returns from the investment. Assuming the employers agrees to match up to 3% of the salary, she will contribute $1200. With this match, she can then invest in Roth IRA for a year and then return to the 401K plan to further resume contributions. By the use of the 401K and Roth IRA, she will be able to achieve her target retirement amount.
Conclusion
The life expectancy for Americans is rising. The young people are targeting early retirement. Therefore, it is essential to make a wise choice when selecting retirement plans. Setting out life goals after retirement offers a better approach to the determination of suitable retirement plans. Choosing a combination of retirement plans will help achieve higher financial outcomes. Quoting George Foreman, “The question isn’t at what age I want to retire, it’s at what income.”>”L?’i_’