Find out how you can start setting retirement goals. Learn the differences between pension, 401(k), and IRA plans and which option is best for you.
Retirement Planning in 2024
An important, but oftentimes stressful, aspect of getting older is planning for your retirement. In the past, retirement was simpler, with most employees relying on pension payments and Social Security benefits. While both options are still available in 2024, the rising cost of living makes these payments insufficient to cover living expenses for many retirees. To secure your financial future, investing in a retirement plan—such as a 401(k) or IRA—is essential. These plans offer flexibility and variants to suit different needs, but the choices can also be overwhelming.
Some plans, like 401(k)s, are employer-sponsored, while others, such as IRAs, require individual contributions. Below is a guide to help you understand the options and make informed decisions.
Setting Retirement Goals
Before selecting a retirement plan, it is important to set clear retirement goals. The average retirement age remains 65 in 2024, as this is when most Social Security benefits are available in full. Early retirement options are available, but they reduce your monthly payments.
Factors to consider include:
- Lifestyle Goals: Do you want to travel, downsize, or stay close to family?
- Medical Expenses: Have you accounted for healthcare costs, including Medicare supplements?
- Debt: Will you carry any debt into retirement?
To estimate how much you need to save, use a retirement income calculator or consult with a financial advisor. These tools and professionals can help outline savings goals and annual contribution plans tailored to your needs.
Defined Contribution Plans
Defined contribution plans, like 401(k)s, remain popular in 2024. These employer-sponsored plans allow both employee and employer contributions. The maximum contribution limits for 2024 are:
- Under age 50: $22,500
- Age 50 and older: $30,000 (includes a $7,500 catch-up contribution)
Traditional 401(k):
- Contributions are made with pre-tax income, lowering your taxable income.
- Funds grow tax-deferred until withdrawal.
- Withdrawals can begin penalty-free at age 59½. Early withdrawals are subject to penalties and taxes.
Roth 401(k):
- Contributions are made with after-tax income.
- Withdrawals in retirement are tax-free if made after age 59½.
Many employers enhance these plans by offering matching contributions, making them a compelling choice. Variants like 403(b) plans (for nonprofit workers and teachers) and 457(b) plans (for government employees) cater to specific groups.
IRA Plans
Individual Retirement Accounts (IRAs) are another cornerstone of retirement savings. In 2024, the contribution limits are:
- Under age 50: $6,500
- Age 50 and older: $7,500
Traditional IRA:
- Contributions are pre-tax, reducing taxable income.
- Taxes are deferred until funds are withdrawn.
- Withdrawals before age 59½ incur steep penalties.
Roth IRA:
- Contributions are after-tax, counted as income in the year made.
- Withdrawals in retirement are tax-free.
- Income limits apply for eligibility to contribute.
Rollover IRA:
- Allows transferring funds from an existing retirement plan into an IRA.
- Transfers may be taxed, depending on the source account and tax treatment of the original contributions.
Pensions
Pensions are less common but remain an option in some industries. These employer-funded plans provide fixed monthly payments for life after retirement. The amount is based on your salary and years of service.
Although pensions are declining in popularity due to the financial strain they place on companies, they remain a reliable supplement to Social Security for those fortunate enough to have them.
Planning for retirement in 2024 requires understanding these options and leveraging tools and advice to meet your financial goals. Start early to ensure a stable, enjoyable retirement.