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  1. Blog
  2. Retirement
  3. March 28, 2023

A Beginner's Guide to Retirement Plans & Financial Literacy

We did the research so you don’t have to

woman planning for retirement
Photo courtesy of Christina Morillo

If you feel uncomfortable when it comes to planning for your financial future, you’re not alone.

A new survey from Bank of America says women feel confident in managing everyday financial tasks such as paying bills and managing a budget, but struggle with longer-term actions like paying down debt, saving for emergencies, building wealth, and saving for retirement.

While saving for retirement topped women’s list of short-term and long-term goals, many women don't have an actionable plan, according to the research. One-in-five women approaching retirement don't have a financial plan—57 percent haven’t figured out how much to save for a comfortable retirement and 40 percent aren’t confident about remaining financially comfortable in retirement.

This issue, in part, is due to a lack of financial education. Financial literacy, the knowledge and skills that allow people to make informed decisions about their personal finances, has traditionally been geared more toward men. When asked about financial regrets, women in the survey wished they’d received more education on budgeting, saving, investing, debt management, and retirement planning starting from a younger age.

The median household retirement savings for women is just $23,000, compared to $76,000 for men, and almost one-third of women say they’ve saved less than $10,000 for retirement—or nothing at all. 

Understanding the different types of retirement plans and how they work is the first step in creating a retirement plan that meets your needs. Here, we’ll break down some of the most common retirement plans and dive into why financial literacy is especially important for women.

Read more: 25 Professional Development Goals You Can Pursue Right Now

Why you should start planning for retirement now 

Retirement planning involves setting aside money and creating a strategy for managing your finances when you are no longer doing paid work. It’s how you plan for your life after your career comes to a close. The overarching goal is to ensure you have enough money to support yourself when you no longer have a steady income.

In 2022, the average age of retirement was 61, which might sound far away depending on your age. But nearly half of retirees (47 percent) report they retired earlier than expected, many because of unforeseen circumstances such as illness, disability, or caretaking responsibilities. 

“Understanding how finances intersect with our personal life is necessary to plan life events like retirement. Planning for retirement as a woman is important because statistically, women live longer than men,” says Summer Jones, a certified public accountant (CPA). The average American man will live to age 76, while the average woman will live to age 81.

“Women are more likely to pause their career to take care of family members, resulting in less contributions towards retirement,” she adds. “It’s important to consider any potential events that may arise during your career and retirement that could affect your retirement plan, as you don’t want to outlive your funds.”

For context, the majority of caregivers are women. And regardless of gender, the longer you wait, the more financial strains you’re likely to have—mortgages, student loans, insurance premiums, and credit card debt can all make it harder to set aside money. Plus, there are hidden benefits to starting early. Compound interest, which some retirement plans have, allows interest to build even more interest, so the sooner you start saving, the more interest you’ll earn. That’s money making more money.

How to begin retirement planning

When starting out, it’s important to take a holistic approach to financial planning. Assess your current financial resources, estimate any future expenses, and then develop a plan to meet those expenses. An example plan might include creating a budget that takes into consideration the income needed to maintain your standard of living, reserving emergency funds, making regular contributions to retirement accounts, and seeking advice from financial professionals.

“Creating a budget that works for you is a great step to becoming financially empowered. If you aren’t tracking your income and where you’re spending it every month, it’s hard to apply financial knowledge and advice you may gain to your personal finances. The more you know about where your money is going, the easier it is to change spending habits if needed,” Jones says.

Begin considering other components as well, such as how Social Security benefits will impact your retirement. The Social Security Administration has offered retirees Social Security income benefits, a monthly check that replaces part of your income, since 1935. How much you’ll receive from Social Security benefits depends on several factors, including how old you are and how much was paid into the system during your working years. You can use this online quiz to see what you’re eligible for.

Finally, look into what your employer or the companies you’re interested in offer their employees. Retirement saving plans are a common job benefit for full-time employees. Many employers offer 401(k) programs that automatically invest a portion of your paycheck, and the company will sometimes “match” part of those contributions, which we’ll explain below. If you’re not eligible for company benefits due to your type of employment (say you’re self-employed, for example), you might have to set up an individual retirement account. 

3 common types of retirement plans

Feeling a little bit more confident about planning for your future? Ready to learn more about a few common types of plans? Let’s get into it. 

1. 401(k) plan

A 401(k) plan is one of the most common employer-sponsored retirement savings plans, and it allows employees to contribute a portion of their paycheck on a pre-tax basis. As of 2023, you can contribute up to $22,500 to your 401(k) or $30,000 if you're 50 years or older. If you see the words “company match” in your benefits handbook, this means your employer is also offering to contribute to the plan by matching a portion of your contribution. Sometimes, it might be a dollar-for-dollar match, or sometimes it might be slightly less, like 50 cents to your dollar.

The money in your 401(k) plan grows tax-deferred, meaning your contributions reduce your taxable income for the year, until it’s withdrawn during retirement. Some main advantages of this plan? It’s fairly easy to set up and maintain. Most employers offer an automatic payroll deduction option for deposits, and the plan administrator can handle statements, disclosures, and updates. 

Keep in mind that if you’re a new employee, you might have to wait a certain amount of time, like 30 or 60 days into your employment, before you can contribute to your 401(k). Employer match contributions might also be subject to a vesting schedule, which means the money only belongs to employees after they’ve worked at the company for an agreed upon amount of time.

2. Individual retirement account (IRA)

An IRA, another very common route, is a retirement account anyone can open at a bank and contribute to, as long as they’re earning income. The Internal Revenue Service (IRS) places a cap on how much you can contribute to an IRA each year—as of 2023, you can contribute up to $6,500 to an IRA, plus an additional $1,000 if you're 50 years or older. IRAs provide a much larger range of investment choices than 401(k) plans do, but they also come with contribution limits and more risk. 

There are two types of IRAs—traditional and Roth. With a traditional IRA, contributions are tax-deductible and money grows tax-deferred until it’s taken out during your retirement. With a Roth IRA, contributions are made after taxes, and the money grows tax-free. Both types have contribution limits and rules regarding withdrawals. If you qualify for both types of IRAs in the same year, you can contribute to both, but your total contributions have to be below the combined limit.

To get the most out of your IRA, you should carefully choose investments to minimize fees, while also diversifying your investments depending on your risk tolerance level—basically, how much stock market turbulence you can handle. If you need help thinking about your asset allocation, the mix of your portfolio’s stocks, bonds and other investments, you can hire a broker to help you make the right decisions for your lifestyle.

3. Simplified employee pension (SEP) 

If you’re self-employed or a small business owner, you can also contribute to an IRA, but SEP plans enable you to contribute more money per year if you don't receive employer-sponsored retirement plan benefits. 

You can contribute as much as 25 percent of your net self-employment earnings up to $66,000, as of 2023. SEP plans have the same investment, distribution, and rollover rules as traditional IRAs, and the contributions are tax-deductible. 

Something to keep in mind—beginning in 2024, the SECURE 2.0 Act of 2022 will allow employees to access up to $1,000 annually from their retirement savings for emergency expenses. The act also allows survivors of domestic abuse to withdraw the lesser of $10,000 or 50 percent of their retirement account, and permits victims of a qualified federally declared natural disaster withdraw up to $22,000 from their retirement account without any penalty.

How to keep expanding your knowledge of retirement planning 

Jones says everyone, regardless of gender, should be equipped with the knowledge they need in order to make educated financial decisions for their future. Many of those resources exist right under our noses. 

Just 14 percent of women “frequently discuss saving, investing and planning for retirement with family and friends,” and 32 percent report never talking about money, according to the Transamerica Center for Retirement Studies. Women don’t necessarily have to discuss numbers, but rather talk about their relationships with money in a judgment-free space. 

“Women can feel more empowered about the financial decisions they make by reaching out to friends and family and having conversations about personal finances. The more we talk with others, the more we learn and feel confident in what we know and the decisions that we’re making,” says Jones. “There are also many resources to learn from, such as financial podcasts, personal finance books, and financial newsletters from trusted sources.”

If you want to learn more about personal finances, Jones suggests speaking with a financial planner, financial advisor, or a certified public accountant. She says, “Selecting the right retirement plan is dependent upon many factors in an individual’s life. Consulting a financial professional who has a fiduciary duty is the best place to start, as they will be able to assess your current situation and discuss the best plan based on your eligibility, needs, and wants.”

Read more: 7 Steps to Take to Achieve Financial Literacy

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