Understanding Retirement Plans: Your Options and What’s Best for You

Retirement is always an interesting topic.

It may be so far in the future that you haven’t really thought about it, it could be closer than you care to admit, or you could technically be retired right now.

It doesn’t matter how old or young you are.  The fact is, you need to start thinking about retirement now.  Today.

You need to know your options.  So I’m going to explain what they are and what to do.

Here’s what you need to know about retirement and planning for it…

Retirement Plans 101

Retirement plans aren’t that complicated.  In fact, you really only have a few primary options:

• Work Retirement Plans – These are things like 401(k)s, 403(b)s and Thrift Savings Plans (TSPs), but it also covers things like pensions (if anyone actually still knows what that means).  There was a day when almost all major companies offered pensions, which was basically the company saying “if you give us 20, 30, 40 or more years, we’ll give you a check for the rest of your life”.  Yeah, that doesn’t really happen anymore in the US, with the exception of the military, but even that isn’t something I would count on.  A Simple IRA is another type of company retirement plan, but only for smaller companies with less than 101 employees.
• Personal Retirement Plans – This would be your Individual Retirement Account (IRA), which is technically and legally known as an Individual Retirement Arrangement since it is simply a shelter to cover an arrangement of investments, not an actual account.  You can use IRAs for more than just retirement, but we won’t cover that here – read about that in this article.  There are also SEP IRAs, which are IRAs that are fully funded by the employer, but most often used for self-employed people to fund their own retirement – that’s why they’re in this section.
• Unconventional Retirement Plans – This would cover anything that’s not a typical retirement account.  One of the most popular unconventional retirement plans would be to sell your home (given that it’s very expensive) and downsize, using the cash you earn to live on.  Of course, this would assume that your home would be paid off by the time you reach retirement.  I’ve also known someone who built a subdivision and owner-financed all of the houses, using the mortgage income as retirement income.  This type of retirement planning can be risky if it’s your only option.  It’s always good to diversify, but especially if your retirement is of this nature.

There are limits to each of these plans; contribution limits, as well as actual limits as to what you can do with them.  There are also misconceptions about a lot of these accounts that I address here.

Now that you’re familiar with your options, let’s talk about what to do about it…

How to Plan for Retirement

You’ve probably heard about an employer match – this is where your employer will match the money you put into your retirement account (401(k), 403(b), etc.), up to a certain percentage.  It’s usually around 6%, though I have known of a company that offered a 100% match.  Yes, you should contribute enough to get the match, because it’s free money.  It’s like getting a 100% return, but then what?  If you want to contribute more than that, do you just put it into your employer retirement plan?  Not necessarily…

The thing is, you do want to get that free money (employer match), but over that, your better off putting your money in an IRA, because you have thousands of options, as opposed to the handful of options your employer offers.  Here’s my personal step-system for retirement:

1. Start by contributing enough to your employer retirement plan to get the employer match.
2. If your employer doesn’t offer a match or a retirement plan at all, obviously skip that step.
3. Pay off all your debt, except your mortgage (if you have one).  This will prepare you to fund your retirement.
4. Fully fund your IRA.  If married, fully fund both your and your spouses IRA, even if your spouse doesn’t have a job.
5. If you max out your IRA (both if married), continue to contribute to your employer’s retirement plan.
6. If your employer doesn’t offer a retirement plan, see if a SEP IRA works for you.  If so, contribute to that.

Once you’ve completed all of those steps, you’ll be looking good for retirement.  If you still have more to contribute, consider opening a standard taxable account, opening/investing directly into a business or investing in some real estate.  Either way, the goal is to diversify as much as possible.

What about Traditional vs. Roth plans?  Most plans offer both options.  Even the TSP and 401(k)s offer a Roth version of the plan.  To keep it simple, I suggest investing in a Roth if you qualify for it.  If you earn too much to qualify for it, good job!  But you’ll just have to go with the Traditional plan.

What do you put in your retirement plan?  I’ve explained the different types of plans, but what goes into them?  Well, you have a few options.  If you’re interested in some individual stocks, read this article for some good ideas.  If you would rather stick with mutual funds, you should go with index funds (I explain why here).  For the specific index funds based on your age, check out this article.

How to Get Started

You can open a retirement account with your employer (or ask if they offer one) by speaking with their finance department.  You can open an IRA in less than 15 minutes at TD-Ameritrade.

If you don’t think you can afford to start investing for retirement, read 3 Ways to Start Investing for Retirement With $100 or Less and you will most likely change your mind.  For more on retirement specifically, check out our Retirement 101 article.  To get an idea of how important it is to start right now, learn about The Slight Edge.  Finally, you can always read our Complete Guide to Investing for more help.  Or leave a comment and ask anything!

Have you planned for retirement?  If so, what’s your plan?  If not, are you going to now?