How do retirement plans work? A retirement plan is a very important part of the future for a persons financial security. A person should understand how a retirement plan works and what benefits they will receive. Similar to having and monitoring a bank account, a person should keep track of their retirement benefits the same. There are rules for managing and overseeing retirement plans that must be followed.
- Understand what type of retirement plans are being offered. Normally, two types of plans are offered through employers called a defined benefit plan, funded by the employer, and a defined contribution plans, funded by the holder.
- Find out when benefits start once a plan is chosen. Read the plan and review the rules of the retirement plan to learn when the benefits will start accumulating.
- Contribute money into the retirement plan each year. Each plan has a limit on how much can be contributed into the plan, however a person cannot give more than what was earned in the year.
- Learn the tax benefits of a tax-sheltered retirement plan. Any retirement plan earns interest, dividends and capital gains free of tax as long as the money is in the plan. This is the largest benefit of a tax-sheltered retirement plan.
- Decide how much will be needed for retirement. A general rule of thumb is to decide what your net will be at retirement and withdraw 4%. However, this amount does allow much comfort in extra spending, which is why it's only used for a rule of thumb.