saving for retirement

Posted : February 15, 2018
Last Updated : March 16, 2021

 saving for retirement

Saving for retirement will ensure that you have enough money to enjoy a comfortable standard of living when you stop or reduce the amount of hours you work. Here's what you need to know about saving for retirement.


An Individual Retirement Arrangement (IRA), also known as an Individual Retirement Account, is the most basic kind of retirement arrangement. With an IRA, you deposit money into an account, which may include a combination of stocks, bonds, mutual funds, or U.S. Treasury securities. These types of accounts are tax exempt and generally designed to help ensure adequate income for retirees.

Though an IRA generally grows over time due to interest earned and your contributions, it may also lose value depending on the stock market and your investment choices. You should talk to an experienced investment professional for help making the best investments for you. There are two main types of IRAs: traditional IRAs and Roth IRAs.

A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible, based on the amount of your contribution and your income. The earnings on the money in your IRA aren’t taxed until they’re distributed (when you withdraw them). A traditional IRA can be established at many different financial institutions, including: banks, insurance companies, and brokerage firms.

A Roth IRA is also a personal savings plan, but operates somewhat the reverse of a traditional IRA. For instance, contributions to a Roth IRA aren’t tax deductible, while contributions to a traditional IRA may be deductible on your annual income tax return. However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA aren’t included in income. For both IRA types – traditional and Roth – earnings that remain in the account aren’t taxed. A Roth IRA can be established at the same types of financial institutions as a traditional IRA.

Under a payroll deduction IRA, an employee establishes an IRA (either a traditional or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction for the IRA, with the remainder of the employee’s pay is distributed to the employee.

401(k) and 403(b) Plans

A 401(k) plan is a retirement savings plan established by an employer that lets its employees set aside a percentage of their pay before taxes are taken out. This can help lower your tax bill.

A 403(b) plan is a retirement savings plan for employees of public schools and certain tax-exempt organizations.

Characteristics of 401(k) and 403(b) plans include:
  • A maximum contribution limit per year – you can invest up to a certain amount of your own money each year, not counting interest earned.
  • A penalty, or fee, on early withdrawal before age 59½, except in special circumstances.
  • Portability – you can move the money into an IRA (called rolling over), or roll it over into a new 401(k) plan if you change employers.
  • Choices – generally, you get to choose how to invest the money in your plan.
  • Your employer may match a certain percentage of the money you invest in the retirement plan. Not taking advantage of this match is like leaving free money on the table.

A variable annuity is an insurance contract that invests your premium in various mutual fund-like investments. During the payout phase, you receive periodic payments calculated according to the amount of premium you invested, investment results and the term of the payout period which may be for your lifetime or for a fixed period (e.g. 20 years). The annuity contract may permit you to receive either payments that are fixed in amount or payments that vary based on the performance of mutual fund investment options.

An annuity is usually sold by financial brokers and insurance agents as an investment toward retirement. The brokers and agents earn a commission on the annuity sold, and may be motivated to sell you something that may not be best for you financially.

Variable annuities can be very costly due to the fees, which may include: annual fees, surrender charges on early withdrawal, and life or living benefit fees. Often, you must hold the annuity for at least 10 to 20 years to justify the fees.

Make the most of your remaining paychecks to save for retirement. How much money you’ll need to set aside for retirement – which, for many people, could last 30 years or more – will depend on a variety of factors, including:
  • When do you expect to retire?
  • Will you continue to earn income from a part-time job?
  • How much money do you have in savings and pensions?
  • What expenses will you incur for housing and health care?

Try to reduce or eliminate debt. Another way to save more money for a more enjoyable retirement is to cut back on unnecessary expenses, especially if you need to go into debt to pay for them. Pay off most or all of your credit card balances and other loans to save on interest charges and avoid being burdened with repayment during your retirement years.

Develop a plan to stretch your money through a long retirement. The idea is to determine where your money will come from during retirement, so you won’t have to live in fear of running out of money.

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