It’s probably occurred to you that you should save for retirement, but for those without any idea of how they’d like to go about it, here’s an overview of some popular options.
The five dollars you have today will not be able to buy as much for you in twenty years as it does today. This is called inflation. The way we get around this issue in saving for retirement is saving our money in a way that the five dollars we put away for the future now will grow and become the amount that we need to buy the same things the five dollar bill could get us today.
These are popular ways of doing this, they include 401k accounts, IRAs, Cash balance plan and purchasing real estate.
A 401k is an employer sponsored savings account. Your employer will usually offer a small match for your contributions, typically up to a certain percentage of your income, around 1-3%. This is very helpful savings bonus that is unique to this type of account. Your savings will then be invested in a plan you choose that involves stocks, bonds, money market accounts, and various other kinds of investments. Over the years your account will hopefully earn you returns, which when combined with the 401k match, should help you avoid inflation and ensure that you save enough for retirement.
An IRA, or independent retirement account, is similar to a 401k except that you set it up on your own. You can go to a bank, credit union, or other financial institution and set one up on your own. You have a lot more control over this type of account. There is no employer match, but you have a lot more freedom in choosing what kinds of investments you’re interested in pursuing.
Like a traditional defined benefit plan, a cash balance plan provides a future benefit amount at retirement. Similar to a defined contribution plan, but unlike traditional pension plans, the promised future benefit is shown as a separate account balance which can then become a monthly pension benefit or a lump sum payout at retirement. Typically, lump sum distributions are available upon termination, death, retirement or attainment of age 62 even if still actively employed. Learn about cash balance pros and cons.
Another popular option, down a very different route, is to invest in real estate. This is an investment you can get some use out of, buying a vacation home, or using it as a rental property and earning money that way over the years. The idea here being that when you go to retire you can sell the property you own and then have cash for your retirement.
When making a retirement plan it’s often best to consider a mix of these types of options to hedge your bets a little and have a variety of investments working for you. This gives you the best of all worlds for saving for retirement.