Developing a retirement plan has become more challenging in recent years. Countless people have lost much, if not all, of their life savings that was invested in the stock market or real estate. Many who planned ahead are now faced with starting over or trying to rebuild their retirement fund.
People who have not yet established a retirement plan are often confused about what needs to be done. While the process can feel overwhelming, there are a variety of tools and resources that can be utilized to sort through details and create achievable goals.
The ideal way to plan for retirement is to establish savings plans as soon as possible. The earlier people start setting money aside the easier it will be to reach their financial goals. Unfortunately, many individuals wait until they are in their 50s or 60s before thinking about how they will live without a regular income.
A good approach is to work with a financial planner. Experts can help people understand which types of investment products are best suited for their long-term needs. They will discuss the pros and cons of each product, as well as ways to reduce capital gains taxes.
There are numerous types of retirement plans. A few of the more popular include: Individual Retirement Arrangements (IRA), Roth IRA, 401(k) plans, 403(b) plans, Simplified Employee Pension (SEP), Profit-Sharing Plans, Money Purchase Plans, Employee Stock Ownership Plans (ESOP), 457 Plans, 409A Nonqualified Deferred Compensation Plans, and Governmental Plans.
In addition to individual retirement plans, business owners can establish plans for their employees. Offering plans is a good way to attract and retain good employees. Furthermore, employer contributions are usually tax-deductible and some plans offer the incentive of tax credits.
Including retirement plans as part of an incentive package offers a variety of benefits to business owners. Along with helping employees save for the future, employers receive tax benefits until funds are distributed.
Most individual retirement plans are available for small business owners who have as few as one employee. A few of the most common plans are payroll deduction IRA, SEP, Simple IRA Plan, and Safe Harbor 401(k).
Another option is defined contribution (DC) plans which are employer-established and do not guarantee a specific amount of benefits. Both employees and employers can contribute to DC plans. When employees retire they receive accumulated earnings along with profits obtained on invested contributions. With that said, if investments result in losses this amount is deducted from employee distributions.
Defined contributions plans encompass automatic enrollment 401(k), Traditional 401(k), and profit sharing.
Lastly, employers can arrange defined benefit (DB) plans which guarantee a specific benefit amount upon retirement. This amount is generally calculated at a set percentage of earned wages multiplied by the years of employee service. For instance, the plan could be set at 5 percent and multiplied by 5, 10 or 20 years.
Each plan has advantages and disadvantages, so it's best to talk with a business law attorney to determine which type is most appropriate. Employers will want to fully understand maximum annual contributions; contributor's options; minimum employee coverage requirements; withdrawals, loans, and payments; and vesting.
Whether you are an individual looking for ways to secure your future or an employer who wants to provide benefit packages to employees, now is the time to start planning. It's advisable to protect retirement plans by engaging in estate planning so that proceeds can be passed along to heirs.
At Craton and Switzer, we work with clients to develop a retirement plan that lets them continue to enjoy the same lifestyle once they retire from the workforce. We invite you to read more about the benefits of retirement and estate planning at our blog, or contact us to arrange a consultation.
Published on December 11, 2012