Financial Planning involves planning for the moment and also planning ahead for retirement. Getting old is inevitable and however much we avoid thinking about it, the solution lies in planning for it. A Retirement Plan is very important because it assures you of income during retirement when you will not be able to earn a livelihood or a regular income. The way you will live during retirement will depend upon how you planned for retirement early when you were fit. A Retirement plan can be designed by the government, your employer, insurance companies, trade unions or employer associations.
The Social Security Fund will provide part of the income which you will need during your retirement years but not all. You will need to supplement the benefits from the government. Social Security is a defined benefit plan which pays benefits to retirees based on the salary they earned during retirement and the number of years worked calculated using the accrual rate formula. The amount paid to the retiree each month is drawn from a trust fund.
Additional medical costs and other expenses during retirement will require you to invest in other retirement plans now so you can be assured of a comfortable life. These include direct contribution plans which include Individual Retirement Account Plans IRAs, 401(k) plans, Roth Plans, Roth 401(k) and other nonqualified plans.
The Individual Retirement Plan Account IRA is one of the best ways to plan for a better future. There are different IRAs and you will need to choose a personalized plan which will meet your retirement goals. These are Traditional IRAs (which defer tax until withdrawal) and Roth Plans. Contributions to a Roth Plan are not tax deductible although interest earned on these contributions is not taxed. The money contributed is put into an account and then invested in mutual funds, stocks and other securities earning income and capital gains which are credited to the account less expenses and losses. The retiree is paid direct contribution benefits based on the amount contributed and the net income and capital gains from the investments.
A Retirement Plan set up by the employer involves both the employer and the employee contributing towards a retirement fund when the employee is in employment. These include profit sharing plans, 401(k) plans and defined contribution plans. When the employee retires he/she is known as a retiree. The retiree receives income from the fund either lump-sum or by monthly payments. When the fund is used to buy an annuity the retiree is paid monthly from the annuity. There are tax advantages for both the employer and the employee. The employer is allowed to make a tax deduction from taxable income while the employee will not be taxed on the contributions to the retirement fund. The capital gains from investment income are tax-free making the fund grow without being taxed until it is withdrawn.
A Retirement Plan that is best for you will provide the maximum benefits for you during your retirement.