So what sort of financial planning should you undertake regarding your retirement?

This page will focus on two methods, both of which you should consider as part of your retirement planning. These are 401(k) plans and IRA plans. We will look at some advantages and disadvantages for each.

Firstly 401(k) plans.

A 401(k) is a retirement plan sponsored by employers and is grouped into two categories - Defined Contribution and Defined Benefit.  The Defined Contribution is probably the most straight forward where you are allowed to make your own contribution and your employer may also make matching contributions of a percentage of your input. At retirement you receive what you put in plus all accruals. The more you contribute obviously means the more you have for retirement.

The Defined Benefit is much better for you the employee.  In this case the employer promises to pay a defined amount to retirees who meet certain criteria.  It links the benefit to the amount of service and is based on the final average salary. Employees can usually predict the monthly retirement income they might receive with this type of plan and might also be given the choice of a lump-sum benefit at retirement. Obviously everyone is different in terms of what they perceive themselves doing in retirement and the amount of money required to fund their chosen lifestyle. That will then decide how much you need to contribute to your 401k.

What are some advantages of 401(k) plans?

There are many advantages to 401(k) plans. Outlined below are three of them:

1.         Unlike a pension, if a participant changes jobs, all contributions can be moved from one company's plan to the next company's plan (or to an IRA)

2.         If your company matches your contributions, it's like getting extra money on top of your salary.

3.         All contributions from employers and any growth in the capital itself experience tax-free growth until withdrawal. The compounding effect of consistent contributions over the period of 20 or 30 years is very significant indeed.

What about disadvantages? One of the main disadvantages with 401(k) plans is the fact that it is difficult (or in any case certainly expensive) to access your 401(k) savings before age 59 1/2 .

The second type of investment vehicle mentioned above in relation to retirement planning is the IRA plan (individual retirement account)

IRAs can come in two types - Traditional and Roth. Firstly the traditional IRA.

Anyone who is in employment can have an individual retirement account (IRA) . One of the main differences between a traditional IRA and the 401(k) plans, is that the employer in this case,  has no role to play with this account. It is opened and maintained by the individual, hence the title, and more often than not would be opened with an investment company. The normal annual contributions cap is $2,000 although this cap may be lower if you have a retirement plan at work or your income reaches certain limits.

What then is a Roth IRA?

The main difference between the Roth and the traditional IRA is that funds must be held for a minimum period of at least five years and if withdrawn prior to that, there is a 10% penalty. If you act as you are supposed to with this plan - hold the funds for at least five years and make your withdrawals after you reach age 59yrs 6 mths, your withdrawals will not be taxable.

IRA advantages?

There are a couple of nice advantages with an IRA.

If you have a job but your spouse does not, you can contribute up to $3,000 of your income to a spousal IRA for him or her. A further plus point is that there is no minimum age limit for IRA participation. If your 15-year-old son has compensation from working in the family business you can pay up to the limits in an IRA.

Retirement planning then should not be taken lightly. You could be talking about a period of 30 years or more if you are spared, and it would be a shame if you had to endure some hardships in your latter years simply because of not planning ahead in the years before. Make an appointment with your local reputable financial advisor who specialises in retirement planning, and get the ball rolling today if needs be.You owe it to not only yourself to enjoy the fruits of all your years of labour, but also your loved ones whom you intend to spend both money on and time with, to get stuck into some proper retirement planning.

401k - IRA

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