Many employers offer a contribution to your retirement plan. In the US it is called a work sponsored 401(k), in the UK it is a personal pension plan – PPP.
How does it work and why use it?
tax relief – money goes to your personal pension plan or 401(k) account before you pay tax from them,
your employer’s contribution – extra money you receive from your employer to your retirement plan if you decide to save your money for retirement.
Many of my readers are young and they do not think they should save for retirement now. However, it is very important to understand you should start saving early, bearing in mind the magic of compound interest. The money you put into your retirement plan today will be working for you for many years – maybe 30-35. What does it mean? If the rate of return from your investments equals 10% annually, after 35 years every pound/dollar will turn into 28 pounds/dollars. If you decide to do it 10 years later, in the same age you will have only 11 pounds/dollars from 1 pound/dollar.
For the rate of return from investments equaling 5% annually, the numbers are 5.5 for 35 years and 3.4 for 25 years. This also shows how important it is to have a decent rate of return from investments.
I think it is worth it. Of course, you do not need to put all your savings into your retirement account. I put there only 4% of my pre-tax salary which is a required amount of money I need to save to get the employer’s maximum contribution. I could save more into pension scheme but there will not be any additional employer’s extra money. The benefits will be only connected with the taxes. I prefer to have the rest of my savings outside of the retirement plan (on ISA account and other broker accounts) – I do not want to retire when I am 60 or 65. I am aiming more into the age of 40.
The conditions of a retirement plan depend on the employer so I can show you how it looks like in the company I work for now. Calculations are based on the example of the British taxpayer, but the rules in other countries are similar.
What do we see from it – if your salary is £85,000.00 annually and you will decide to contribute to your pension scheme 4% of your salary, you will receive £500.00 every month to your retirement plan. If you would not contribute to your pension scheme, your take home pay would be £133.00 instead. It means you ‘pay’ only £133.00 to receive £500.00. And of course, you can invest the money later.
Please note I am not a regulated financial advisor and so any help will be non-advisory. If you are unsure of the suitability of any investment you should seek professional financial advice.