Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest
It is never too early to start planning for your retirement. With the cost of living continually increasing, it is more important than ever to start saving for the future. Two great places to start are with pensions and annuities. Pensions are generally offered through your employer and insurance companies offer annuities. Both are great ways to begin saving for the future.
Pensions
Pensions are generally a series of payments made to a person after they retire. The payments are made regularly and are for past services with an employer. A pension is a means for providing a secure income for life.
A defined contribution plan is a pension where both employer and employee contribute money. You are responsible for investing your money during your working years, and there is no guarantee on how much money you will have at retirement. The pay out will depend on how much was contributed, and how successful you were at investing.
401(k) plans are payroll deductions that save a portion of your current salary for retirement. These plans are tax-deferred. This means that you do not pay taxes on the money put into a 401(k) until you withdraw the funds. You can invest your 401(k) as you see fit, and often your employer will match a portion of what you put into the plan.
403(b) plans work like 401(k) plans. An employee will put money from his paycheck into the pension plan. The employer usually matches the contribution. The main difference between the 403(b) plan and the 401(k) plan is only employees of non-profit organizations can contribute to a 403(b) plan. Eligible organizations include schools, hospitals, and churches.
Keogh Plans are pension plans for self-employed workers. Workers can use these plans to establish tax-deferred retirement accounts for themselves and their employees. There is a limit to how much of your income you can put into a Keogh plan each year. Also, there is a limit in the total amount of money that can be contributed to the plan.
There are pension plans specifically geared to small businesses. The Simplified Employee Pension (SEP) is designed for businesses with no other pension plans in place. They are tax-deferred accounts. The owners put money into the account, and employees manage the investing. Saving Incentives Match Plans for Employees of Small Employers (SIMPLE) are pension plans for businesses with 100 or fewer employees. Employees put a portion of each paycheck into an IRA. The employer matches the contribution, and employees decide how to invest the money. If the employee changes jobs, they still keep their IRA account.
Annuities
An annuity is a series of fixed payments, which can be paid over a fixed amount of years, over the lifetime of an individual, or both. Insurance companies provide annuities. An individual pays a lump sum or a series of payments (premiums) to an insurance company. In return, the individual receives a fixed income payable for the rest of his/her life. Like pension plans, there are several types of annuities.
A fixed period annuity allows an individual to receive definite amounts at regular intervals for a set period of time. The insurance company sets an interest rate for one year at a time, and resets the rate at their discretion. The interest accumulates and is tax-deferred for most people. There are several choices to choose from when receiving pay from this annuity. A life income allows the person to receive a monthly check for as long as they live. Joint and survivor annuities send checks to the annuitant for life. If they die, a second annuitant receives payments at regular intervals for as long as they live. A fixed period annuity pays a set amount monthly for 5 to 30 years.
Variable annuities combine the advantages of a tax-deferral with professionally managed investment portfolios. An individual is allowed to select different investment options with different objectives to suit their needs. The rate of return on the annuities will fluctuate. The varying rate of return is tied to the performance of the different investments chosen by the individual. There is a potential for higher returns than with a fixed annuity, but there is also a higher risk of loss.
Whether you choose a pension plan through your employer or an annuity through an insurance agency, you have made a great start in securing your financial future. You might want to eventually invest in both an employer pension plan and an annuity. The more you save for your retirement the easier it will be to retire when the time comes.
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