What it is?
A retirement plan is a solution for providing financial resources to someone in retirement. There are many ways to create a retirement plan, but the most common method is to grow financial assets in the years leading up to retirement, and then draw from those assets to create an income stream during retirement. This can be augmented by other income sources such as Social Security benefits or an employer-provided pension.
Who it is for?
These plans can be useful to anyone who does not plan to spend their later years working. Unfortunately, many people do not consider a plan for retirement until later in life, so they have to play “catch-up” or delay their retirement until longer than desired. In general, the earlier a person starts planning financially for retirement, the better their outcome will be.
How it works
The most common way to plan for retirement is to periodically invest money with the objective of growing it, creating a “nest egg”. As suggested earlier, the earlier a person starts saving, the more time their money will have to grow. Once a person is ready to retire, they can start taking income from that nest egg to pay for their living expenses.
Different types of coverage in existence
Retirement savers in their early years are likely to allocate to stock market investments, but as a person nears retirement they may be better off going with more conservative assets such as bonds. Once it is time to take income, there is the option to take withdrawals as needed from a retirement account or look at a guaranteed income option. One such option is an annuity, which can provide income that is guaranteed for life.
The most obvious benefit of a plan for retirement is the peace of mind that comes from having financial security in life’s later years. Even years before retirement, there are benefits of saving for retirement, though. Contributions to some retirement accounts pre-tax, meaning that savers can deduct their contributions from their taxable income in the year they make the contribution.