When you reach a certain age, you want to know that you are safe in the knowledge that you have a retirement plan to take care of yourself and your partner for the years after you stop working.
Even if you feel like you can keep going, there is only so long this is true before your body gives out.
In this instance, you need a basic retirement plan to help you through your later years, but what is a basic retirement plan?
Sometimes these retirement plans are caught up in investments or stock portfolios, or they are plans set through a company, but the majority of retirement plans are what’s called basic retirement plans.
But what is this type of retirement plan? Is it something I want to invest in? Or is it something I want to pass on? In this article, we seek to find this out.
What Is A Basic Retirement Plan?
There are actually quite a few basic retirement plans that you can have going forward.
This is because most people don’t expect to be working beyond a certain age, and so instead invest their whole lives in order to live in relative comfort from these investments.
So, with that said, let’s look at the most basic of retirement plans:
Pensions
Pensions are the bread and butter of retirement planning.
These are pots of money that you pay into over the course of your entire working life, and when you retire they will be paid out to you over the course of the time you remain among the living.
Company Pensions
The most common form of pension pot in the US is what’s called a 401K.
These are company pensions offered to an employee that they can pay into for the time that they are with the company.
In modern companies, there are two types: the traditional 401K and the Roth 401K.
A traditional 401K will have the employee contributions to the pension come from the employee’s gross income before any taxes have been deducted from the salary itself.
While this is good in the short term for your livelihood, as your taxable income is reduced, and thus you pay fewer taxes now, it does mean that when you are retired, you will have to pay taxes on every withdrawal you make from your pension pot.
A Roth 401K will have the employee contributions to the pension come from the employee’s income after taxes have been deducted.
This means that once the money is paid into the pot, it is no longer taxable, so you do not have to worry about taxes taking a portion of your money with each withdrawal.
State Pensions
Almost everyone who lives in the United States today is covered by what is known as the Social Security Administration, which is basically a federally funded pension.
Social security is determined based on your average yearly salary throughout your life and when you began claiming it.
The lowest social security pension is for those who earn around $25,000 a year and claim at age 62; this pays out $772 a month, whereas the highest social security pension is for those who earn above $150,000 a month and claim at age 70, this pays out $3782 a month.
Since it is based on age and the salary you earned throughout your life, it is always worth having another pension pot on the side just in case as well.
Savings
Some people never invest in a pension program or into state pensions – normally because they don’t trust that these systems won’t collapse.
These people only trust one thing, and that is cold, hard cash. As such, this retirement plan is that they just save all the money that they need for their later years.
Unlike other retirement plans, this can be slightly difficult, as it requires extreme self-discipline to achieve this, and it requires you to not only trust you can hold onto that money, but that disaster won’t strike you or your savings, requiring that money to be used.
If you are extremely wealthy with multiple different avenues for your wealth, then that is different, but for most people, it is not the best retirement strategy.
Is It Worth Paying Into A Pension Plan?
Absolutely, it may not seem like it now, and with the financial world becoming more unstable, it may seem like a wasted effort.
However, the generations currently working now are going to live the longest of any generation before them, and when you reach 70, you really don’t have the energy or the ability to keep working as you once did.
Even if you get only a little bit of cash from a pension plan, you will thank your lucky stars that that little bit of income comes through.
There are many people who are reaching retirement age that are dreading retiring, due to their lack of funds and money.
These people are wondering what they are going to do, and you do not want to end up in their position.
Are There Other Retirement Options?
There are a few other retirement options, but they are mostly for the well-off or extremely wealthy, which may not be applicable here.
One of the best options open to ordinary people though is that of semi-retirement.
Semi-retirement basically means that you stop working full-time but keep working part-time, allowing your body to somewhat rest, while still keeping a steady flow of income.
It is not good for some people, but for others, it is great, as it allows them to keep working at their pace and not have to dip into their hard-earned savings or pensions just yet.
Conclusion
The basic retirement plans tend to revolve around a pension pot – either a company or private one – combined with a state pension and savings.
However, you can plan for your retirement in multiple different ways and if you have a different idea or your financial advisor is giving you a different idea of how to go about it, then you might want to try something different.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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