Saving for Retirement Basics

Everyone over age twenty needs to save for their retirement; retirement is a holiday which lasts twenty years or more depending on retirement age and should be treated as such. Saving early is essential for everyone because programs such as pensions and social security are either on the endangered list or extinct for many people.

Social Security

Social security benefits were at one time a reliable source of income for retirees, today anyone born after 1970 can expect to have to wait until at least age 70; furthermore social security benefits will only be 30% of most peoples pre retirement income.

Pension

Many companies are trading traditional pension plans for employee savings accounts, employer matching retirement accounts, and/or stock options for their employees. For companies that do still offer pension plans the amount of benefits can be tied to years of service or by hire date; looking into the companies individual policy will help the employee to decide the best saving approach to supplement their pension.

Employee Savings Accounts

Some companies offer employee savings accounts which are tax deferred; the money in tax deferred accounts are not subject to taxes at all until the money is withdrawn. Many companies offer to directly withdraw the funds from the employees paycheck and deposit it into their savings account; these accounts are commonly known as 401K or 403B accounts.

Most of these employee savings accounts have an annual limit to the funds the employee is able to contribute to the account; for example many employers set a maximum percentage such as twenty percent of the employees annual salary.

When the money is withdrawn it is taxed as regular income; this percentage is usually less than what the person was taxed while working, because they are in a lower tax bracket post retirement.

Employer Matching Retirement Accounts

Many companies offer matching retirement accounts; these are tax deferred accounts in which the employer will match a percentage of the deposited funds after an employee is vested. Vested usually refers to a set amount of time which the employee must be in service of the company before they are eligible for certain benefits; for most companies this is 2-5 years.

After the employee is vested the company with match the employees contributions to their tax deferred savings account by a certain percentage; some companies raise the percentage as the employees time with the company increases.

Stock Options

Financial advisers encourage people to use a variety of vessels to save for retirement such as stocks, bonds, and savings accounts; they also suggest that every investor have a diverse portfolio. Employers will usually offer one of two kinds of stock options; one will give the employee the option to choose from a pre-selected collection of stocks and bonds with a variety of risks and gains, while the other will only offer the employee company stock.

There are ways around the blander of the two styles however a financial adviser is the best person to tell an employee the most cost effective way to diversify their savings portfolio. Many investments will take a minimum of ten years to show any real results; starting to save money early is essential to meeting retirement goals.