Retirement plan selection.

Retirement plan selection.

Introduction

According to Clark et al ( 2017), many employees have adopted the act of obtaining a retirement plan as a means of survival once the employment period is over. A retirement plan is a financial arrangement between an organization and employee and are designed to replace the employment income after retirement. Retirement plans are usually set up by employees, the government, trade unions, insurance companies and other financial institutions. As a way of obtaining a high return from such plans an employee is entitled to choosing the best retirement option as a way of future financial security (Clark et al  2017). Choosing the best retirement option will act as a guide to an employee by helping him/her in planning for their financial spending.

Some employer companies usually guarantee their employees retirement benefits with agreements which should be fulfilled once the employment period is over (McNeil, 2017). However, there have been some basic claims of increased tax rates to employees and this determines the retirement option to choose. Examples of these retirement options includes 403B, 401K, Pension, Annuities IRA and Estate planning. In this essay, I will compare these different retirement options for my new employee who has just joined my company. She has opened a savings account and with the benefit of increased bank interest of 5%, she has been in a position to make an accumulative amount of $40,000 on annual basis. Nevertheless, the rate of return of my company’s’ stock is 4% per annum and thus considering this, my new employee would like to retire with 60 million dollars in her savings account.

1. The 403B retirement option

Barth et al (2016) says that this is a type of retirement option for employees who are willing to obtain a tax overdue in their retirement period. This type of retirement option is most available to employees of non-profit making organizations, public schools and members of the clergy. This type of retirement option is centrally to my company because we aim at satisfying customer whilst maximizing profit. This option can be advantageous to the employee because she will be able to get tax leverage and once she enrolls, the compounded amount will just come out of her paycheck. It is therefore a good option for her.

1. The 401K retirement option

This is a very good retirement option for my employee because it is a retirement saving plan. It will let her save and invest a piece of her salary and this is before taxes are taken out. The major benefit which the employee will obtain from this is that, taxes will not be paid until she starts withdrawing money from her savings account (Barth et al, 2016). In this connection, the employee is likely to achieve her target of 3 million in her savings account. The withdraw will also be penalty free.

• Pensions

A pension is a retirement plan that will require my company to make contributions to a certain pool of funds which should be set aside for the future benefits of my employee (Clark et al  2017). This retirement option operates in that, the pool of funds is made on behalf of the employee and that the funds invested will earn income that will be useful to the worker once she retires.  It is also an option that will allow my employee to contribute part of her current earning from her salaries and thus it can help her achieve her goals. The advantages of this this option are that, the employee will realize a tax advantage status and thus can enable workers to plan for their future spending though she will be required to control her investment decisions well (McNeil, 2017).

1. Annuities

According to Clark et al  (2017), annuities are mostly considered as means of securing a steady cash flow especially after an employee has reached his/her retirement period. It is basically an insurance contract whereby my employee will be required to pay my company a specific amount of money either once or in series of times. Upon making such periodical payments, my company will invest her money and then promise to pay her on regular bases once she retires. She can however decide to choose a fixed annuity or variable annuity depending with her future plans. This option is tricky because even though the company is ready to take charge, the amount of retirement options will depend with her efforts to save (Barth et al, 2016).

1. IRA and Estate planning

An IRA is basically an account the employee can set in our company and which will enable her to save for her retirement on tax deferred basis (McNeil, 2017). It operates on stocks, bonds and other mutual funds which are still available in my company. When the employees retires, she will be free to start making withdraws from her account the company will be free to tax her savings but that will not affect her provided she will have achieved her savings target of 3 million dollars in 60 years. It is advantageous because she can trade options using this account (Barth et al, 2016). Estate planning is the process of arranging and anticipating for one’s life after retirement and enables one to reap benefits in future, it can therefore work for my employee.

Conclusion

In conclusion, it is important for my employee to consider some factors before selecting a retirement plan. The employee should consider the period in which the company has allowed her to remain in employment. This will enable her plan well for her retirement and thus choose if she will be able to meet her target of 3 million dollars.  The employee should also consider the amount of tax which her retirement savings are likely to attract. Questions on weather to pay tax now or in future should be answered before choosing the best option. She should also consider if she has other sponsored plans so as to achieve her savings goals.

Reference

Barth, J. R., Hilliard, J., Jahera, J. S., Joo, S., & Lee, K. (2016). State Pension Plans for Public      Employees: A Rough Road Ahead.

Clark, R., Lusardi, A., & Mitchell, O. S. (2017). Employee financial literacy and retirement plan   behavior: a case study. Economic Inquiry, 55(1), 248-259.

McNeil, B. J. (2017). To Be or Not to Be a Deferred Compensation Plan. Journal of Deferred       Compensation, 22(2), 44.