Workers need to survive when their working days are over. They need a regular source of income to pay their bills when they can no longer work. Thus, every worker needs a retirement plan for the rainy days ahead.
Workers can choose from the different types of retirement plans available. Each of these plans has its strong and weak points. Thus, workers can go for the one that best meets their needs. Below are some of the popular retirement funds:
Defined Benefit Plan (DBP)
This plan offers workers guaranteed money at retirement. Workers who subscribe to this pension plan are promised a certain amount of money as their monthly retirement income by their employers. This money is guaranteed by the federal government. During the calculation of the monthly retirement income to be received by a worker, certain factors are considered: age of retirement, employee’s pay before retirement, years of employment, and several other factors.
The defined benefit plan is good for employees who are not investment-savvy. Employees who are under this don’t need to worry about taking any investment decisions. Thus, the fear of making wrong investment decisions that might have a negative impact on their finance after retirement is non-existent. All employees under the defined benefit retirement plan have to is work until their retirement age and start collecting the promised monthly retirement income from their employees.
Although the defined benefit plan is a very safe retirement plan, it is extremely difficult to find employers who offer this plan to their employees. Many employers do not like promising guaranteed money to their workers at retirement. These employers prefer other forms of pension plans.
Another downside of the defined benefit plan is the inaccessibility of the fund until retirement. It is very difficult for employees to have access to the funds prior to retirement. Thus, even if employees are in difficult financial situation, they can’t access these retirement funds. In cases where employees retire earlier than schedule, they still can’t to the funds until they reach the normal retirement age.
Defined Contributory Plan (401k)
In this retirement plan, the employer and employee jointly contribute to the employee’s retirement fund, which is invested in the stock market. The returns on investments are credited to the employee retirement savings account. This plan is risky as it heavily depends on the performance of the stock market.
The value of 401k plans appreciates when the stock market performs well and depreciates when the stock market goes through difficult times.Employees have more control in this kind of retirement plan. They can increase their own share of the amount contributed into the fund. Employees can also the assets they want their funds to be invested in.
One of the benefits of the 401k plan is fund accessibility. This plan allows early withdrawal of funds by the owner. In difficult financial situation, employee can borrow from their 401k plan to sort out their problems.
This plan is a mixture of defined benefit plan and defined contributory plan. In this plan, some amount of money in an employee’s retirement funds is invested and the rest is left untouched. The untouched money provides a safety net for employees in case their investments nose-dive. Thus, this plan is good for employees whose investment strategies lie between that of risk-takers and safe-players.
Individual Retirement Account (IRA)
There are different types of individual retire account: Simple IRA, Self-directed IRA, Roth IRA, SEP IRA, and Traditional IRA. Of these different types of individual retirement accounts, Roth IRA is the most common. In Roth IRA, after-tax money is used to make contributions to the account, and tax-free withdrawals are made on the account. This retirement account is very tax-friendly.