I want to know what exactly is a retirement plan and is it government funded or..
Is it , for example, $10 you put into the retirement fund every month and at the end of , lets say the year , you have – $120. ??
If that’s the case then why should I even have a retirement fund. I can just put it in my savings account can’t i ? Am i wrong. Please help me.
retirement plans are basically accounts that are designed to grow and keep up with (or exceed) inflation. You put money into it as you go, and it grows that way, but it also accumulates interest. Most retirement accounts also include stocks and bonds that grow with the economy (or shrink with it sometimes), so it’s like continuously making a little extra money in the background.
Most IRA’s (individual retirement accounts) are tax-deferred. This means that you don’t have to pay taxes on the money that you put into it… yet. The difficulties are that 1) you don’t get immediate access to the money – in fact, you are hit hard with penalties if you try to withdraw from it before you are officially retired, and 2) when you retire, then when you draw money from the account, you are taxed in a high bracket – as if the money in your account is your annual income (which means you could be in the 50% tax bracket if there’s a lot in there). It’s great for getting to keep more of your money now and also being able to have enough money to live off of when you retire, but if that’s where all of your money is going, then you are going to get creamed on taxes later on.
There are also other retirement account types, including Roth IRA’s and 401(k)’s. Those you get taxed on now, but there is little or no penalty for early withdrawal and you don’t pay taxes on it when you withdraw in retirement. The downside to those? There’s a limit to how much you can put in those.
Then there are pure stocks and investments, not part of IRA’s. The only difficulty with those is that you are taxed 15% of how much they grow (it will be 30% if Obama has his way).
The government funded retirement plan is called Social Security. The Social Security system is incredibly flawed (have you ever heard of a Ponzi scheme? Look it up. Social Security is the biggest one ever, and it’s mandatory). When you get old enough, the government pays you to be retired. The amount, though, is really not very good. You can only live off of it if you also have other retirement income.
The reason you would want a retirement account is because those grow on their own, faster than inflation. Putting your retirement into a regular old savings account, the money will not grow fast enough to keep up with inflation, and you are therefore by default losing money instead of actually keeping it. Now don’t get me wrong, you do need a regular old savings account because you need a backup stash of money that you can get at quickly (whereas retirement funds you can’t get very easily until you are retired). But to have a savings account as your retirement plan is not a good idea.
If you start it now, then you’ll have more when you retire.