A pension plan or Social Security benefits are no longer enough to cover costs for an employee once they’re past their working life and enter retirement. Saving for retirement is a tricky thing, and has to be done right if you don’t want to end up suffering during your retired years.
Here is some advice by Bill Schantz on how to choose the right retirement plan for you.
The 2 Major Types of Retirement Plans by Bill Schantz
A 401(k) is the most common type of retirement plan, sponsored by employers. You get a few investment choices and a portion of your paycheck goes into the account where it gets invested and allowed to grow via compounding. Sometimes, employers will also match the contributions.
These are tax deferred, and you also have to pay a penalty if you try to withdraw money from the fund before you reach retirement age.
IRAs are retirement accounts that you can open and contribute to yourself, as long as you are earning an income and/or married to someone who is. According to Bill Schantz, IRAs can offer more investment options than plenty of other plans that are sponsored by employers.
The broker fees are also much lower. IRAs are tax deferred, but some types like Roth IRAs allow you to pay the taxes now and then make withdrawals later, tax-free.
You can also choose to contribute to both accounts at once, but you have to stay within the maximum possible contribution limit.
Bill Schantz Explains How to Invest For Retirement
With both, 401(k)s and IRAs being investment accounts, your retirement fund is growing based off compounding, so you have to pick the right kind of investments to make sure you won’t get stuck later on in life. Here are the most popular investment options, as stated by Bill Schantz.
Stocks are high risk assets, but also come with high returns. Over the long term, stock prices tend to rise, which is what makes them good investments for your retirement as long as you are in an early stage of your life and can handle the ups and downs.
Bonds are also popular, and while they have a much lower return, they also come with lower risk. Bonds are good for retirement funds when you are close to retirement age since they will make you some money without putting you at risk. That said, they won’t bring in high income though.
Mutual funds are a sort of basket of assets that contain multiple different assets with different levels of risk. These are very popular since they combine the high returns of risky assets with the low, but safe returns of less risky assets, and thus create a balanced option.
As Bill Schantz says, if someone has the option for multiple retirement accounts then there is no real problem with choice. But if there’s only one option, choosing what plan works for you will depend on how you expect to be living in retirement and what you want from life at that age. Your investment choices will also affect this decision.