Planning to Meet Your Retirement Goals
As you plan for your retirement, you will come across several different types of financial plans or investment vehicles to help you reach your goals: Social Security, employer pension plans, employer sponsored retirement plans, and personal savings, to name a few. But, if you are like most, at some point you will find yourself wondering, which is the best option for you. The good news is that you don’t have to choose just one. In fact, a combination of several can be a wise strategy.
The Social Security program began as a method to minimize poverty among the elderly in the wake of the Great Depression. While originally designed to provide financial assistance, Social Security benefits were never intended to be a retiree’s sole source of income. Instead, they were viewed as a supplement to other protection plans, like insurance and personal savings. Today, the Social Security Administration reports that less than half of the average American retiree’s income comes from Social Security payments.¹
A new budget legislation signed into law by President Obama on November 2, 2015 included a provision that will end two frequently used Social Security benefit claiming strategies: File-and-Suspend and Filing a Restricted Claim of Spouse Benefits. These changes may have a significant impact on your retirement savings plan. Changes to these Social Security claiming strategies will take effect 180 days after the legislation is enacted, on May 1, 2016.
Defined Benefit Plan
A defined benefit plan identifies a specific financial amount that you will be eligible to receive from your employer at retirement – and guarantees that amount in the form of monthly payments for life. An employer pension is a common type of defined benefit plan. While all plans are structured differently, the basic benefit calculation takes several factors into account, like years of service and average final salary. Essentially, in exchange for years of service an employer is promising to pay a certain amount at retirement. Defined benefit plans are complicated and costly to maintain, making it easy to understand why the number of employers offering them has been steadily decreasing. The limited access to this type of plan means that individuals need to take a more active role in their financial future.
Defined Contribution Plan
More and more employers are replacing defined benefit plans with defined contribution plans. Defined contribution plans, like a 401(k), 403(b), and 457, are plans provided by your employer to help you save for your retirement. In contrast to a defined benefit plan, where an employer is funding the account, a defined contribution plan grows with money that you contribute.
Individual Retirement Plan (IRA)
An Individual Retirement Account (IRA) is a savings plan independent from your employer to help individuals accumulate funds for retirement. Earnings are tax-deferred until withdrawals begin.² This may help savings to grow faster than they would in a taxable account. An IRA by itself, however, is not an investment vehicle. It’s actually an account. Think of it as a container to store any stocks, bonds, mutual funds, or other assets that you have been collecting for retirement.
While Social Security benefits can provide a solid base, the bulk of retirement income will most likely come from personal savings, investments, and employer-sponsored retirement plans. When planning for retirement income, it is important to consider all potential sources of income and estimate how much you can expect each one to provide.
1. Social Security Administration, 2015.
2. An additional 10% federal penalty may apply for withdrawals made prior to age 59 ½.