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Running head: Saving for Retirement

 

Saving for Retirement

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Mike Essary

11/11/07

Saving for Retirement

Planning and saving for retirement may seem like goals that are far in the future. Yet saving, especially for retirement, should start early and continue throughout your lifetime. Of the 60 million wage and salaried women working in the United States as of March 2005, just 47 percent participated in a retirement plan. Remember, even small amounts can earn interest and add up over time. Women are more likely to work in part-time jobs that don't qualify for a retirement plan. And working women are more likely than men to interrupt their careers to take care of family members; therefore, they work fewer years and contribute less toward their retirement. If you work and if you qualify, join a retirement plan now. On average, a female retiring at age 65 can expect to live another 20 years, 3 years longer than a man retiring at the same age. Savings can increase a woman's chances of having enough money to last during her retirement. By and large, women invest more conservatively than men and receive lower rates of return from their investments over time. Choose carefully where you put your money and learn how to make your investments grow.

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Making sure that we have enough money for the end of our working days is the biggest financial challenge most of us ever face. As we live longer and retirement years increase, solid savings become ever more important. If you save your money in a bank or building society account, your funds should grow – at least enough to stay ahead of inflation. If you want your funds to grow more quickly, you could consider investing them. Bear in mind that most investments carry a risk – your funds can rise or fall in value. Investments include, for example, stocks and shares, bonds and collective investments and property. Most people dream of retiring by the age of 55, but the reality is that the average individual ends up taking their retirement by the age of 65. So to be on the safe side, you should plan your retirement for 60, keeping in mind that it will most likely be at 65. Assuming you're currently 30, this leaves another 30 years to save up for your retirement. And if you feel that you still have not saved enough by the time you hit 60 years old, you still have a buffer of 5 years to add to the golden pot.

Retirement Plans, a variety of government, employer, and individual financial programs that help provide a livable income when a person stops working. The three principal sources of retirement income in the United States are the government-sponsored Social Security system, private employer-sponsored retirement plans, and individual savings plans. These three sources of retirement income have often been called the “tripod of economic security.” Most experts agree that people need to receive income from all three sources to remain financially secure during retirement. Canada also has a similar “tripod of economic security.” Private pension plans are supplemented by the Canada Pension Plan, which supplies retirement and disability income and survivors’ benefits to older workers, keyed to the amount of their lifetime earnings. The Canada Pension Plan, in turn, is supplemented by Old Age Security and the Guaranteed Income Supplement, which are paid to people over 65 regardless of how much they earned. The United States and many other industrialized countries have a growing retiree population and are expecting that growth to continue.

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The number of years you plan to live after retirement will also affect how much money you need at retirement. Obviously, you won't need nearly as much if you plan to live an additional 2 years past retirement, unlike someone who plans to live until 100. The important thing to remember is that you shouldn't underestimate your lifespan, because you don't want your bank account to run dry while you still have another 10 years to live. So to be on the safe side, let's assume you'll live until 90 years of age. This means that if you plan to retire at 60, you'll need a cash reserve (cash account, treasury bills, bonds, stocks, mutual funds) large enough to last you 30 years.

A money purchase pension plan is a defined contribution plan in which an employer promises to make a set contribution to the plan each year. The contribution to the money purchase pension plan can be made either as a flat dollar amount or as a percentage of the employee’s pay. Only money purchase plans created prior to the passage of ERISA permit employee contributions on a pre-tax basis. Also, money purchase pension plans do not allow withdrawals while workers are still actively employed, and spouses have certain rights to assets in these plans, as with other tax-favored retirement plans. Historically, many employers typically offered a money purchase pension plan and a supplementary 401(k) plan. If a 401(k) plan was offered alone, the IRS limited the amount that could be contributed to 15 percent of an employee’s pay. If both a 401(k) and a money purchase plan were offered, the limit on combined deductible contributions was 25 percent. Starting in 2002, the Economic Growth and Tax Relief Reconciliation Act of 2001 increased the allowable contribution percentage to 25 percent of an employee’s pay for the type of plan typically used with 401(k)s. As a result, the use of money purchase pension plans alone may decline in future years.

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Social Security provides a monthly payment that is annually adjusted for cost-of-living increases. The amount of the benefits depends upon a person’s age and their earnings. The Social Security Administration informs participants annually of an estimate of the benefits they will receive if they retire at 62 or later. The earliest age that a person can begin withdrawing Social Security is 62, but early withdrawal means reduced benefits. The only exception is for widowed spouses who can begin withdrawing at age 60. Social Security is not the only government-sponsored retirement plan. Other programs include pensions for war veterans, the Railroad Retirement System for railroad workers, and other special government employee pensions.

Many private employers in the United States maintain retirement plans for their full-time employees. About 66 percent of the labor force is covered by some kind of retirement plan. Very few companies offer retirement plans for part-time workers. These plans developed for a number of reasons. One reason was tax incentives. An employer may take an immediate tax deduction for a contribution into a retirement plan even though benefits will not be paid to employees until some future time. To compete with other companies for workers, some businesses offered retirement plans as a way to attract and retain workers. Finally, to absorb a younger work force, many companies offered retirement plans as incentives for older workers to retire and make way for younger workers who earned lower salaries. Employer-sponsored retirement plans fall into two categories: qualified plans and nonqualified plans. Qualified plans, in turn, take two major forms: defined benefit plans and defined contribution plans. There are also so-called “hybrid plans” that contain attributes of both forms. Nonqualified plans do not receive the same tax benefits as those provided to qualified plans.

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Resources

Franklin, Mary Beth (2007) Retirement Saving Made Easy.(congress passed legislation for 401(k) plans) Kiplinger's Personal Finance Magazine; Feb 1.

Gallery, Natalie(2003) Forced Saving: Mandating Private Retirement Incomes. (Reviews).(Book Review) Economic Record; Mar 1.

 
 


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