How to Build Your Own Pension Plan

admin // November 16 // 0 Comments

Companies that offer their employees a pension are rare these days. Fortunately, it’s easy to access financial planning tools to help you design your own pension plan that will provide a steady source of income throughout your retirement years, no matter how long you live.

The appeal of not being able to outlive your savings is strong. Not having enough money to get through a long retirement is one of the top concerns of near-retirees, today.

Build up savings

Saving a portion of your income is crucial if you want to retire someday. If you want to retire without worrying about how to continue to pay your bills, you’ll need a plan. Before you can invest, you need to have a chunk of money on hand.

401(k)

First, maximize your 401(k) contributions to get the company match if you have one available. For example, if you work for a company that offers a 50% match of the money you contribute to the 401(k) account up to 6% of your salary, your match will look like this:

Salary: $80,000

You contribute 6%: $4,800

Your company contributes $.50 for every $1 you contribute: $2,400

Not only does this decrease the amount of income you’ll pay taxes on by $4,800 per year, it sets you up to receive an extra $2,400 of income for your retirement account that you wouldn’t otherwise get.

You can contribute a maximum of $19,000 per year via salary deferment if you are under 50, or $25,000 if you are over 50.1

Individual Retirement Plan (IRA)

This type of savings offers another way to cut your tax bill. You can contribute up to $6,000 per year to a traditional IRA if you are under 50 or up to $7,000 per year if you are over 50.1

Contributing pre-tax income to your 401(k) through work and to a traditional IRA offers valuable tax savings. Both are considered “above the line” tax deductions, so they reduce your taxable income whether you itemize or take the standard deduction.

There are income limits governing the tax deductions related to contributions to IRA accounts. Here’s how they work:

  • If you tax filing status is married filing jointly and both filers have the opportunity to participate in a 401(k) retirement account through their employer, you can take the full tax deduction if your combined adjusted gross income is smaller than $103,000 during 2019.
  • If you tax filing status is married filing jointly and just one filers has the opportunity to participate in a 401(k) retirement account through their employer, you can take the full tax deduction if your combined adjusted gross income is smaller than $193,000 during 2019.
  • If you tax filing status is single and you have the opportunity to participate in a 401(k) retirement account through your employer, you can take the full tax deduction if your adjusted gross income is smaller than $64,000 during 2019.2

You have until the tax filing deadline to contribute to an IRA. So, even if you didn’t do so in 2019, you could still get the tax deduction for contributions if you made them before April 15, 2020.

A single person in the 25% tax bracket who makes a $5,500 IRA contribution will save $1,375 in federal taxes. Figure out how much money you saved on your tax bill by contributing to retirement accounts and put it in your investment fund.

Annuities

This is a complicated financial product, so it should be considered after you’ve fully-funded your retirement accounts and received the benefit of the applicable tax deductions.

Insurance companies issue annuities, but you can purchase them through stockbrokers, insurance agents, or banks. Annuity investments aren’t federally guaranteed, so if you decide to purchase an annuity, you’ll be dependent on the financial soundness of the insurance company.

Research your annuity options and the insurance companies offering annuities carefully before investing your money. Look up their ratings on

  1. https://personal.vanguard.com/us/insights/taxcenter/contribution-limits?lang=en
  2. https://www.fool.com/retirement/2018/11/03/ira-contribution-limits-are-increasing-almost-10-i.aspx

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