Types of Retirement Plans – Best Retirement Plans for Beginners

Types of Retirement Plans – Best Retirement Plans for Beginners

People from around the world think of investing in some types of retirement plans. These are financial arrangements that are created and designed in order to have a source of income for those who would be retiring at a certain age. People who plan for their old age can have something to look forward to especially when they have to leave the workforce or when they have to stop working because of health reasons.

There are several types of retirement jobs plans that can be set up by employers or by insurance companies. There are also those that are offered by trade unions, by the government and other kinds of institutions. The various plans are classified according to how people benefit from them.

Defined contribution retirement plans

This type of retirement plan is sponsored by employers that provide individual accounts for each of the members. The benefit that people derive comes solely from the contributions that they have made including the investment gains from those funds. Employees or workers contribute funds into their accounts which are invested into the stock market for example in order for it to earn some returns. This, in turn, will be credited or debited from their individual accounts. When people retire, their accounts will provide for their benefits through annuities.

Most workers or employees in the private sector consider these types of retirement plans which include IRA or the Individual Retirement Account, the 401K as well as forms of profit sharing plans. People are given the chance to select the kind of investments where their contributions will be allocated. They may be given choices such as mutual funds, individual stocks or other types of securities. These self-directed types of retirement plans are usually given some tax advantages by the government. However, people are not allowed to withdraw their funds until they reach the retirement age that has been specified.

Defined benefit plans

These types of retirement plans are mostly known as pension plans which may be offered by government agencies or by large corporations. People get benefits from a trust fund that has been set up by sponsors. The plan specifies a certain amount of benefit that will be paid to people when they retire. People who invest in pension plans do not carry individual accounts but the usual benefit that they get is almost the same as the number of years that they have worked which is multiplied by their salary at retirement. The amount is then multiplied again by a certain accrual rate. People may get their benefit in the form of Single Life Annuity or in the form of Qualified Joint and Survivor Annuity or QJSA.

People may avail of their benefits when they reach 65 years old which is considered as the normal retirement age. They may also choose to get other forms of payment like lump sum if they would like to. These types of retirement plans can be funded or unfunded. Employers and employees may contribute to the funded type which is put into a trust fund so that workers or employees may benefit from it upon retirement. However, there is no guarantee that the contributions made at present will be enough to meet obligations in the future. The assets and the liabilities have to undergo the valuation process at regular intervals so that the defined benefit plans remain qualified.

The unfunded type of retirement plan is paid through the contributions to the plan or through the general assets. Social Security benefit, for example, is an unfunded retirement plan as people are paid from the taxes and from the contributions of the members.

Hybrid types of retirement plans

There are types of retirement plans that combine defined contribution plans and defined benefit plans. These are designed to meet tax as well as regulatory and accounting purposes such as the Cash Balance plan where the individual account balance increases because of the defined interest rate coming from the annual contribution of the employer.

People usually enjoy tax benefits from most types of retirement plans. The money that they contribute is often not considered as taxable income. Employers are also able to receive the tax deduction for their contribution as it will be counted as employee compensation. The contributions may also be invested without taxes on the earned income every year. When people withdraw their money then that will be the time when they have to pay for taxes as it will be considered now as taxable income.

Choosing retirement plans

People have to plan carefully so that they may be able to choose correctly from the various types of retirement plans. Workers or employees have to choose their accounts from those that are presented by their employers, their income as well as their tax requirements. They also have to treat their contributions as part of their future investment. People have to determine how much money they will need when they would retire. Their plans need to include how they are going to save the money that they would need in the future. They can also think of other investments such as stocks, bonds as well as cash aside from the available types of retirement plans that they can avail of.

Although people plan for their old age, they still run the risk of outliving their savings. Most of the time, they may find themselves having to work for a living past their retirement age or they may live in poverty until they die. It is important for people then to really think about the kind of life that they will have later. Those who retire with only the minimal funds have not really planned for this stage of their lives.  They may have made the wrong investment decisions when they were still young and active in the workforce.

People who are nearing retirement age have the shorter time to prepare and it may be a little difficult for them to catch up with the retirement savings that they need within a very short period of time. One of the best things that people can do is to select from the best types of retirement plans that are being offered to them while they are still young. They can also choose more than one form of retirement plan especially if their finances would permit them to do so.