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The Typical Retirement Plan Options:

Employer-Sponsored 401(k) Plan

A 401(k) is a savings plan created by employers. Eligible employees can make contributions directly from their paycheck without being taxed. Subsequent earnings are tax-deferred. Early withdrawals are subject to penalties. If a 401(k) Plan is offered to you through your place of employment, take advantage of it.

Many companies offer a matching program. This means that whatever you contribute is matched by your employer, usually up to 5 or 6% of your income. In order to receive these additional funds, you need to participate at a certain level in your 401(k) plan, but as long as you can do that, why wouldn’t you? Free money is hard to come by.

Individual Retirement Account (IRA)

Another popular plan with definite tax advantages is the Individual Retirement Account. With a traditional IRA, you save tax-deferred money that gets invested in a variety of ways. If you already have a 401(k) through an employer, you can save even more for retirement with an IRA. Savings in an IRA is typically invested in the following ways.

Stocks and Mutual Funds – By far the most popular choices, these are arguably the best way to increase your savings. Some people are adverse to risk and, therefore, afraid of this option, but stocks and mutual funds generally beat inflation and allow your money to compound via dividends and increases in share prices.

Bonds – Putting your money into bonds is a good choice for the more cautious of investors. You will still end up with more than with money markets and CDs. Dividends can be spent or reinvested..

CDs and Money Markets – These options are your safest option, but give the lowest amount of interest.

Roth Individual Retirement Account

A Roth IRA is another type of retirement plan where your earnings grow tax-free, similar to that of a self invested personal pension in the UK. The difference is, you have to pay taxes up front and, in order to let your money accrue tax-free, hold the account for a five year minimum. There are fewer investment restrictions and withdrawals are tax-free, though certain rules may apply.

Changes occurring within your Roth IRA (interest, dividends, capital gains) are not taxable. Contributions are not tax deductible, but once deposited into your account, your money will grow free of taxes.

403(b) Plan

This type of retirement plan is solely for the employees of certain public schools and other organizations that are tax-exempt. Some ministers fall into this category. You, the employee, can not set up a 403(b) account for yourself. Only your employer can set one up for you. Contributions are made by your employer through salary reduction agreements. Some plans allow you to make after-tax contributions.

These are funds put into your plan from some other source of income. No income tax is paid on these contributions until you start withdrawing from your plan, normally not until you are retired. (Contributions made to a Roth program are initially taxed but then remain tax-free until you start withdrawing and, if certain requirements are met, sometimes even then.)

If you are ready to start saving for retirement, take a minute to educate yourself. You’ll be glad you did.

This is a guest post from Eric at Personal Profitability as part of the Yakezie blog swap. This week, we have a blog swap chain. You can read my post at Money Talks and read Barabara Friedberg’s post on Eric’s blog. Be sure to check out everyone’s great posts! This week, our topic is “You’re homeless/poor, how would you change your situation?”

The best sports cars in the world can go from zero to sixty miles per hour in under five seconds. Going from poor to rich takes a lot longer. To get back on your feet, you need a well formulated plan that you can execute.

Pre-Action – Evaluate

What did you do to end up poor? Did you lose your job? Did you get into serious debt? Do you have a gambling or addiction problem? You have to evaluate your situation and take a serious, objective look at your situation.

Take Responsibility For Being Poor

I know a lot of people who seem to be perpetually broke. They blame outside factors for their money problems. The credit card company charged them a late fee. They are not paid enough. Their boss cut back their hours. Their rent is too high.

Now let’s look at what really happened. They missed a payment, they did not pursue the right education or did not negotiate the right salary to meet their desires, they did not work hard enough, they signed a lease for a home they cannot afford.

It is incredibly rare that something happens that is so far beyond your control that you have absolutely no responsibility. Take control of your future and your destiny. Take responsibility and concrete steps to move forward.

Phase One – Income

If you are poor, it means you do not have the income or savings to live. Step one is to find a reliable income source that meets your needs. If you are smart enough to read this site, or any other finance blog, you are smart enough to get a job that can pay the bills.

Retail and food service jobs are a dime a dozen. Most are easy to come by and do not pay very well, but they pay. If you think a service job is below you, think again. You are broke. As a Bill Gates, the second richest person in the world, once said, “Flipping burgers is not beneath your dignity. Your Grandparents had a different word for burger flipping — they called it opportunity.”

Phase Two – Expenses

Assess your monthly expenses. Generally, the highest expenses are rent and food. After that, you have transportation, utilities, and miscellaneous living expenses. Add up your monthly expenses using a budgeting tool. Do those equal more than 100% of your income?

Are you ready for the hard truth? Many people, including you if you are broke, live beyond their means. They don’t understand the difference between a want and a need. Cable television – want. Smart phone – want. Late model car – want. Going to see movies – want. Junk food – want. Starbucks, and all coffee – want.

You get the idea? Cut back everywhere you can. Live a minimalist lifestyle. Unless you make more than you spend, you have to raise your income or cut your expenses. Period.

Phase Three – Saving

Let’s assume you follow this advice for a few months. You should be getting back on your feet. If not, return to the evaluate step above and repeat the plan as necessary. If you are broke, it is your fault. It is no one else’s fault. Fix it.

As you are on the road to recovery, it is time to make sure you don’t end up broke again. Start putting money into savings. You should be able to put about 10% of your monthly gross income into savings and investments. Save up at least three months worth of living expenses in a liquid (cash available) savings account. Once you hit that point, keep saving in longer term investment vehicles.

Before you know it, you are far from broke. Work hard and you can become self reliant and stable in no time.

Have you been broke?

Have you been in a tough financial situation in the past? I don’t mean month to month, paycheck to paycheck living to pay your credit card bills. I mean in default, worried about losing your apartment or house broke. If so, please share your experiences in the comments below. If not, share your plan to get back on your feet.

photo by sagriffin305