Retirement planning: Most of us know about employer-sponsored 401(k) and pension plans, but do you know how a Personal Pension Plan can make a huge difference in your retirement?
A Personal Pension plan is your own personal retirement plan. You buy to ensure you have adequate funds for your retirement.
According to the Motley Fool, “Older Americans Are More Afraid of Running Out of Money Than Death.” The main reason is too many people have not saved enough for retirement. According to one survey, 43% of over 50-year-old workers say their greatest fear for retirement is outliving their savings.
This sentiment is further driven home by an Allianz study of over 3,000 baby boomers. The study showed that 60% were more afraid of outliving their savings than actually dying. But if running out of money in retirement is a fear worse than death, why aren’t more Americans doing something about it?
Retirement Planning Using Personal Pension Plans
With all this in mind, let’s talk about a personal pension and why this strategy is needed today.
Today, more than any other time in recent history, there are more people working for themselves and more people only working in one place for a year or two before moving on.
The traditional employer-sponsored plans are not working to benefit everyone.
Employees can’t take advantage of these plans for two reasons.
First, many employers require employees to be on the job for six months or a year before they can qualify for enrollment in the plan.
Second, most employer-sponsored plans do not vest immediately. With some plans, if you change jobs before the employer contributions are vested (are granted to the employee) – which could be as long as three to five years, the employee loses the employer’s contributions.
These two factors can cause an employee’s contribution to lose out on valuable compounding time. As a result, their money doesn’t grow adequately (it can really add up), and they have to put in more money to get the desired results.
Is a Personal Pension Right for You?
If you decide that a personal pension plan may be a good option for your retirement planning, then there are additional considerations.
Investing in the proper vehicle can also make a huge difference.
For example, there are certain types of plans that will guarantee that you will have value when you need it.
Other plans guarantee that the value of your plan will never go down as does stock-market-based investments.
With employer-sponsored plans, another consideration is the money you invest is generally pre-tax – meaning that you don’t pay taxes on it. This lowers your tax bill and your take-home income. On the surface, this looks appealing, but most people don’t realize that you pay taxes on the back end when your income is reduced.
Under current tax codes, some personal pension plans offer a way to take your money out without any tax liability.
And, some plans will make sure the money is there for your survivors.
The Bottom Line
If your employer offers a 401(k) and they match your contribution, as part of a benefits package, it’s a good idea to invest at least the same amount they match. It’s free money. It helps some people to invest in this type of plan because they never see the money and are less likely to spend it frivolously.
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