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How to Plan For Retirement

Monday, 03 Jan 2011 05:22 PM

To plan for retirement effectively, one must factor in several criteria. For example, inflation reduces the purchasing power of the dollar. Upon retirement, income decreases. Ideally, it should increase, to compensate for the loss of purchasing power. Unfortunately, very often, this is not the case. You generally wind up paying more for food, clothing, shelter, and medical expenses, among other things. In addition, medical emergencies tend to arise more frequently among the elderly. Retirement planning must take into account all of these factors.
Saving for Pension and Retirement
Sound financial retirement planning can ensure that your lifestyle remains comfortable even after you have given up work. It can also ensure that your dependents are taken care of reasonably well. Therefore, make it a habit to save regularly for a pension. In addition, most retirement-related investments offer tax benefits.  In other words, you do not have to pay tax on the income earned by the money invested in retirement-related accounts. This government incentive should help you to plan retirement more effectively. 
Retirement Pension Plan
A retirement pension plan is a benefit you receive as an employee. The benefit plan is established or maintained by an employer or an employee organization such as a union. The plan provides retirement income or postpones it until your employment terminates and further inflow of salary income stops. Many retirement pension plans are available including the 401 (k) plan and the traditional pension plan, also called the defined benefit plan. Most private sector retirement pension plans are covered by the Employee Retirement Income Security Act (ERISA). ERISA protects participants and beneficiaries in employee benefit plans.
Financial Planning for Retirement
Retirement pension plans covered by ERISA include defined benefit plans and defined contribution plans.
A defined benefit plan promises a certain monthly benefit upon retirement. Most of these benefits are protected by federal insurance subject to certain limits.
The defined contribution plan, on the other hand, does not promise a specific amount upon retirement. The employee or the employer or both contribute to the employee’s account. The contributions are invested on the employee’s behalf. The account balance fluctuates with the value of the investments, and the employee ultimately receives the balance standing in the account. That is, the amount he/she receives equals contributions plus investment gains minus investment losses. A few good examples of defined contribution plans are 401 (k) and 403 (b) plans, employee stock ownership plans, and profit-sharing plans.
Considering the financial burden that the pension retirement plans place on small employers, the Department of Labor of the U.S. government has initiated pension plans for them.

To plan retirement effectively, start saving early.  It will work in your interest as well as your dependents.

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