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How to Choose the Best Retirement Plan

How to Choose the Best Retirement Plan
Written by Irina Vasilescu

How will you live when you retire? Many of us don’t even think of it while we are young, and there seems to be so many other stuff our money need to do for us, that we forget to save for later; but the sooner you begin to plan for retirement, the more comfortable you will be.

It’s important to remember that what sounds like a lot of money now may not be as much by the time you reach retirement age, so the greater your contributions now, the better your chance of having enough money to enjoy your retirement. Ideally, you should begin salting money away in a pension plan as soon as you start to earn. The longer you contribute, the better your retirement will be.

Let’s look through the different types of retirement plan so that you can decide what works best in your situation.

Standard pensions

Nowadays, few private companies offer standard pension schemes, but municipalities and government agencies often do. You don’t have to do anything to get your retirement plan. Your employer does it all for you, and the longer you work, the more money you get when you retire.

If you have a pension plan, you should still consider finding ways to get additional retirement income, because many programs don’t accommodate changes in the cost of living. If you retire at 65 and are long-lived, you may find yourself struggling to get by when you reach 85.

Besides, if you move into the private sector, you’ll lose the benefit of your pension plan, and most of us change jobs several times during our careers. Bottom line? Nice to have, but you need more!

In a nutshell:

  • Your employer pays your contributions.
  • You have no real choice between plans. Your employer does everything.
  • You should make additional provision for yourself.

Defined contribution retirement plans

There’s a whole alphabet soup of programs that fit this description. 403b and 401k plan contributions are not taxed but will be when you begin drawing the pension.

Roth 410k plan contributions are taxed, but when you withdraw the money, there’s no tax to be paid. This group of pension plans is voluntary. You decide whether you want the program, and how much to contribute, but some plans won’t let you contribute more than a certain amount per year.

A lot of private sector employers offer such plans, and they usually match all or part of your contribution, beefing up your retirement money. Deductions are automatic.

The best thing about these plans is that you are entitled to all the contributions if you leave your employer.

Whatever you do, don’t fall into the trap of thinking it’s an excellent bonus and spending it. Save it and invest it in your next retirement plan or look for good investments that will grow and yield income when you retire.

Usually works like this:

  • Your employer chooses the plan.
  • You contribute out of your earnings.
  • Your employer usually contributes too.
  • The money remains yours if you leave.

Roth IRAs

Roth IRAs have a few benefits if you qualify to sign up. For example, paying tax now means you don’t have to pay later when you have a limited income. You can withdraw funds that you have contributed, but it is best not to do so, as you will pay a 10% federal penalty, and it will affect your retirement income.

If you work beyond retirement age, you can keep contributing, allowing you a higher income when you do retire.

Choose it to:

  • Benefit from tax-free income when you retire.
  • Think you may work beyond normal retirement age.
  • Are starting to contribute to retirement while still young.

Traditional IRAs

These pension plans are like Roth IRAs, but the primary difference is that you don’t pay tax on contributions, but will pay tax on withdrawals. Tax deductible retirement contributions can be helpful, especially if you are a big earner. There’s a limit to how much you can contribute, and you must begin drawing your retirement benefits by the age of 70 ½.

This type of plan is particularly useful if you want to:

  • Have tax deductible retirement contributions.
  • Don’t want to pay capital gains tax.
  • Retire within the next ten years.


SEP IRAs are for self-employed people. SEP stands for Simplified Employee Pension plan. Contribution limits are high, and you can use this to save tax while salting money away for your well-deserved retirement.

These plans are flexible, so when you can’t contribute much, you don’t have to. Contributions are not taxed, but your income from your plan will be taxed.

Choose this type of plan when:

  • You are self-employed.
  • You have variable income.
  • You want to reduce taxes in good years.
  • You want to reduce contributions in bad years.

Nonqualified deferred contribution plans

These plans are much like Roth plans, but they are usually used by high earners who want maximum income when they retire. Contribution limits set by other programs would not yield the kind of revenue they’re looking for, so they may take out this type of program as an additional investment. Your money is invested on your behalf, and capital gains tax will not apply.

These plans are chosen by those who:

  • Have and want to maintain large incomes.
  • Want to contribute more towards retirement than other plans allow.
  • Want to benefit from an investment without capital gains tax.

Guaranteed income annuities

You invest your money and get a guaranteed income when you retire. Retirement isn’t the only reason for an annuity, so be sure to choose the right package.

For example, single-premium annuities start paying out immediately, which isn’t a good idea if you’re trying to grow your retirement fund.

Deferred income annuities are better, and you can get your cash assets back if for some reason you decide to cash in or change your mind. Be very sure that you have chosen an established company with a proven track record.

Annuities are best when:

  • You have a lump sum to invest.
  • You want control over when to trigger income.
  • The firm has an excellent financial management track-record.

Cash-value life insurance plan

Yes, it’s a life insurance plan, but you can also use it towards your retirement.

Here’s how it works. You pay your premiums as you would with any other life insurance plan, but you can withdraw money from it for your retirement as a “loan.” The amount you qualify for is based solely on the value of your plan. If your policy has a $1 million value, you can withdraw all or part of it. If you leave an amount in the plan, it goes to your beneficiaries when you die.

Choose it if:

  • You want life insurance that offers withdrawals.
  • You want a two-in-one solution.
  • You want flexibility as to when you can cash in.

Note: It’s good to combine this type of plan with additional provision for your retirement if possible.

Social security

Social security is notoriously never enough, but the payments could represent a substantial portion of your retirement income. You can maximize the payout by claiming later than you are entitled to do so. The longer you wait before you claim, the more you get. In an ideal case scenario, you would trigger other income streams earlier on your retirement, supplementing this with social security later on.

A balanced investment portfolio

Most people think of the stock exchange as a “gamble,” but there are stable companies that can offer real growth for your money. To hedge against slumps in certain sectors, a balanced portfolio should consist of shares in:

  • Financials
  • Industrials
  • Resources

Don’t split your money evenly between these types of shares. Industrials are usually the best for financial yield, followed by financials. Resources are a hedge against tough times, and currently, some investment managers are avoiding them. This said, resource share prices are still relatively low now, and are expected to grow for the time being.

Choose low-risk companies with good value growth and low income during your early investment years, changing to low-risk companies with slower growth but better dividends when you retire. A good investment manager should be able to advise you.

This is an excellent long-term strategy that puts you in the drivers’ seat, but it has some drawbacks:

  • Although you can start small, you will need substantial investments by the time you retire.
  • Management is complex, and the choice of shares plays a role.
  • No investment is completely without risk.
  • Capital gains tax is paid when shares that have grown are sold.

Real Estate

Real estate can give you a steady income stream during your retirement, but like other investments, there is a slight element of risk (for example, falling property value). In addition, you will still have to take care of the property or else pay someone else to do so.

Choose it if:

  • You are confident that you will be able to rent or sell when you need to.
  • Your properties can be debt free by the time you retire.
  • You will not only be dependent on property income.
  • You can’t afford NOT to plan for retirement.

If you’re flinching at the thought of the cost of a retirement plan, and are thinking you’ll worry about retirement when the time comes, think again. Do you want to be among the unfortunates who must remain employed in their golden years? Do you realize that it gets harder to find a decent job as you age? Save yourself from struggle and a great dip in your standard of living by planning for your retirement now.

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How to Choose the Best Retirement Plan

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About the author

Irina Vasilescu

Irina Vasilescu is our money-saving and DIY expert and also the editor-in-chief as she's always on the lookout for the latest online deals.

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