Pension in the USA: a complete guide on how to secure a decent old age in America

In the US, each person is responsible for his or her pension savings, and even Americans, not to mention immigrants, have a hard time understanding all the intricacies of the American pension system. Read the material below. The New York Times in translation ForumDaily about what you need to know about the accumulation of money after the end of a career and how to retire comfortably, regardless of profession and salary.

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Start early

The best day to start saving is today, even if you can set aside a very small amount.

The main advice about retirement savings is: start now. Here are two reasons why:

1. Magic of interest on interest. You probably already read about this, but it’s best to see firsthand.

The curves in the graph show income at the age of 67. If two people save the same amount of money each year ($ 5 000) at the same percentage (6 percent per year) and stop depositing at the same age (67), the one that starts saving in 22 will end up with almost twice as much than the one who started saving money in 32. In other words: an investor who started saving money on 10 years earlier will have $ 500 000 more on retirement. Just like that.

2. Saving money is a habit. Even if the mathematical benefits of saving money are obvious, it is not always easy. But the appetite comes in the process. You will feel more and more satisfied as the numbers on your balance grow.

How much need to postpone?

The short answer is: as much as you can, says Karl Richards, author of the Sketch Guy column. The Internet is full of articles with tips on saving at least 15% of revenue. This is a good figure, but in fact it depends on how long you are going to work, how much inheritance you expect to receive, and a few other unknown factors. Start at least with something, even if it's $ 25 from each paycheck. And try to increase the bag every year. Start early and make contributions to your retirement account more often so that procrastination becomes a habit.

Investment Account Options

If you have already decided to postpone retirement, you need to find good options for investment.

There's a whole alphabet of retirement account options: 401(k), 403(b), 457s, IRA, Roth IRA, Solo 401(k) and many others. They have emerged over the past decades and their purpose is to provide certain benefits to people. But the resulting system is causing confusion among many.

The first thing you need to know is that choosing an account depends largely on where and how you work.

If you work for a commercial employer

Available invoices: 401 plan (k).

If your employer offers a plan, then this is probably 401 (k). (If the company is small, then maybe not). As a rule, you can subscribe to it at any time, not necessarily in the first week at work or in a certain period throughout the year. You just need to fill out a form and indicate what percentage of your salary you want to postpone. The employer will transfer this amount to the accounts of the company that will save it for you (for example, Fidelity or Vanguard). This is where automation comes to the rescue. Some employers will automatically raise the percentage each year, if allowed. And it's worth it.

What you need to know about 401 (k)

Addendum: If you are lucky, the employer will add money to your savings. This may be a duplication of your contribution, up to 3% of the salary, or 50 cents for each dollar you save, up to 6% of the salary. Whatever they offer, agree and get the most of this money. This is the same as raising a salary, only better - because over time this amount will increase significantly due to interest on interest, which we spoke about above.

“Ceiling”: How much can you save for according to plan 401 (k)? This is regulated by the federal government, and every year the amount increases slightly. Actual figures can be viewed here.

Taxes: As for other plans from the employer, when saving money to account 401 (k) you do not pay income tax on deferred money, but you will need to pay taxes when withdrawing this money.

If you work for a non-profit employer

Available accounts: Plans 401 (k), 403 (b) and 457.

If you work for the government or for a non-profit employer (school, religious organization or charity), then you have several options.

What you need to know about plan 457: This plan is similar to 401 (k) described above.

What you need to know about plan 403 (b): These plans are often offered by nonprofit employers — 401 (k) are less common here — and they are more complex and expensive. You may be encouraged (or forced) to invest in pension insurance instead of the mutual funds that 401 (k) plans work with. (We will tell more about mutual investment funds below). Pension insurance is, in fact, an insurance product, and it is difficult to understand even for specialists. Hence its high cost - the cost of this product is quite high.

In some cases, especially if your employer does not supplement your contributions, it may make sense to stop using 403 (b) and choose an IRA, which will be discussed below.

If your employer does not offer plans or you work for yourself

Available accounts: IRA, Roth IRA, SEP and Solo 401 (k) plans.

If you are self-managing your retirement account, then it is likely to be IRA plans available through financial firms such as large banks and brokers.

What you need to know about IRA

Choose where to set up your IRA: Ask your financial institution for a complete price list to compare services. How much is buying and selling your investment? Is there a monthly payment if the balance is too low?

In general, choosing what you invest in influences your long-term savings more than where you keep your money, since most of these firms offer fairly competitive rates.

Ceiling: As with 401 (k), this plan may have limits on the amount that can be put on the IRA per year. The one-year limit depends on income and other circumstances. The federal government updates limits every year or two. Actual numbers can be seen on this link.

Taxes: Taxes from different IRA plans are paid differently. With a traditional IRA, as a rule, you do not pay taxes on the deferred amount, and thus your taxable income is reduced by the amount of the pension contribution. Current information on restrictions for different incomes and deposits can be found on government resources or at the company where you opened IRA. As in the case of 401 (k), you will pay tax on money from your pension fund when you withdraw it after retirement.

What you need to know about the Roth IRA

Roth IRA is an IRA type, but with slightly different parameters. If you plan to put money on the Roth IRA, you must pay tax on them before. But then, when you withdraw this money in retirement, you will not have to pay taxes on them. Roth IRA is a great option for lower income young people who do not pay high income taxes at this stage of their careers. The federal government imposes strict limits on regular contributions to Roth, which can be found. here.

What is SEP and Solo 401 (k)?

SEP (Simplified Employee Pension) is another IRA option, along with Solo 401 (k) for self-employed persons. They have their own rules, which make it possible to postpone more than with a regular IRA plan. Limits can be read from the links above.

What happens when you change jobs?

When you leave work, you have the opportunity to withdraw money from your old 401 (k) or 403 (b) account and combine them with other savings from your previous jobs. In this case, talking about the transfer of money (rolling the money over) on the IRA. Brokerage firms offer various tools that will help you with the procedure. The process itself can be read by this link.

However, some old employers will try to persuade you to leave your account under their “wing”, and new ones will try to convince you to transfer your old account to their plan. Why do they all need it? Yes, because the more money they have in their accounts, the less they pay for this program for their employees.

There are drawbacks both in leaving money and in transferring to a new employer. Most employers have a rather limited investment choice, but your IRA broker will usually allow you to invest in any low-cost index fund of your choice.

As a rule, it is better to keep all your retirement savings in one place. So it’s easier to track them. Therefore, when leaving the company, transfer your retirement account to IRA to simplify the management of your money, especially if retirement is close. In addition, there may be problems keeping in touch with your former employer, especially if you move or change your email address. And not every company will look for you when the time comes for your retirement.

Read also on ForumDaily:

What kind of pension will I receive in America

Pension in the USA: everything you need to know immigrants

How do retirees live in New York

How immigrant pensioners live in New York

What you need to know about retirement in the US

More American pensioners are moving to other countries

10 ways to prepare for retirement in the US

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