Each and every person starts to wonder at one point about what they will do once they are old enough and can’t work anymore. How exactly will they make money and will the amount be enough to cover their needs? Luckily, retirement and a pension income await us at the end of our work years. If you didn’t know this, retirement is the moment when you decide to stop working, while a pension is a defined amount of income you earn once you retire.
Some people continue to work even after they retire. Most of the times, they opt for small-time jobs to keep the cash flow going. However, once you’ve officially retired, you’re entitled to a pension, which is determined by the amount of time you spent working and the period of time you worked in a specific job. In order to secure enough funds for retirement, people need to understand how it works and to start saving and planning as early as possible. Here are a few tips for financially sound retirement.
Start saving early on
If you plan on having a bit of extra cash flow once you retire, then you should start saving as early as possible. To most people, additional savings which they have accumulated during their lives are the main income in their retirement plan. The other type of income such as a pension is used to cover bills and other expenses. In other words, retired people use their retirement savings for a bit of luxury, such as an extended vacation to some tropical place.
Once you decide to have a retirement plan, start saving by reducing expenses. For instance, save on energy or cut out items that aren’t essential to you ‒ not all of them at once, but a few is a good start. Also, save a part of your income on the side, 10 – 15% is quite enough to save for retirement.
Invest in individual retirement accounts
Individual retirement accounts (IRAs) will add nicely to your retirement fund. There are two types of IRAs, a traditional IRA and a Roth IRA. Traditional IRA contributions may be tax deductible if you’re not part of an employer sponsored retirement plan and if your income is below a certain level.
People with incomes that are below certain levels can also invest in a Roth IRA. However, Roth IRA contributions aren’t deductible, but they provide additional benefits. For instance, Roth IRAs are not subject to income tax and they have more distribution flexibility. Also, people over the age of 50 can make additional annual contributions to Roth IRAs. Individual retirement accounts are a very good way to save enough funds and have a financially sound retirement plan.
Decide when to take social security
Social security determines the amount of money you’ll receive once you start drawing your pension. The amount is based on the age at which you went into retirement. You can retire between age 62 and age 70, with 62 being the early retirement age with reduced benefits. The full retirement age with full benefits is between 65 and 67, and age 70 is the late retirement age with extra benefits.
If you retire at the age of 62, your pension may be 25% lower than it would be at the full retirement age. On the other hand, if you retire at age 70, it may be 32% higher than it would be at the full retirement age. You can take an aged pension income test to help you identify just how much benefits you’re entitled to when you retire at a certain age.
Have an employer retirement plan
Investing in a corporate retirement plan is also a good way to secure your retirement. You can accumulate a hefty sum in your corporate account, especially with a 401(k) plan. The amount you accumulate with your 401(k) plan reduces your taxable income and there is also a possibility of employer matched contributions.
The contribution amount limit is the highest among any other retirement plans. For instance, in 2017 in the US, employee deferral limit is $18,000, with $6,000 additional limit for people of the age of 50 and over. Also, joined contribution limit for both the employee and the employer is $54,000 and $60,000 for people of the age of 50 and over in 2017.
Saving for a retirement plan as early as possible is a really good idea. Make sure you understand your options so you can enjoy your golden years the best possible way and have a financially sound retirement.