Read time: 5 to 6 minutes
Basically, your retirement plan is a powerful tool that helps you prepare for a comfortable retirement. But it’s also so much more. So let’s uncover the facts.
Why your plan is so important
What is a retirement plan?
You get benefits from your employer—like medical and dental—in addition to your salary. And you also get your retirement plan, such as a 401(k), a 403(b), or a 457.
Your retirement plan is maybe the most important. Why? Because it’s the best way to save for your future—to accumulate the money needed to cover the bills when you stop working.
Your plan is not only loaded with tax benefits, it also has automatic features to help you save and invest wisely. Plus you can make sure your loved ones are protected, too.
Read on to find out more about the benefits of saving in a retirement account.
Your retirement plan is maybe the most important. Why? Because it’s the best way to save for your future—to accumulate the money needed to cover the bills when you stop working.
Your plan is not only loaded with tax benefits, it also has automatic features to help you save and invest wisely. Plus you can make sure your loved ones are protected, too.
Read on to find out more about the benefits of saving in a retirement account.
A way to save on taxes
The government wants you to save for retirement. In fact, to encourage you, it will give you a tax break on the dollars that you save.
Pre-tax
You can save in your employer’s plan with pre-tax money. This money is not taxed before it’s contributed.
Plus, you don’t pay taxes on the money your contributions earn. That means you could enjoy tax-free growth for many years while you’re working and contributing.
Your contributions and their earnings will be taxed only when you withdraw money from the plan, ideally when you’re retired.*
Roth
Most plans offer a second tax-savings option. This is commonly known as Roth.
Roth contributions are taxed when you make them. So Roth contributions and their earnings aren’t taxed when you withdraw the money, if you meet two conditions: You’re over age 59½ and you’ve held the account for at least five years.**
Roth contributions are taxed when you make them. So Roth contributions and their earnings aren’t taxed when you withdraw the money, if you meet two conditions: You’re over age 59½ and you’ve held the account for at least five years.**
*If you withdraw money from your retirement plan before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
**If you make withdrawals before age 59½ or five years, you may have to pay ordinary income tax on the money, a 10% federal penalty, or both.
**If you make withdrawals before age 59½ or five years, you may have to pay ordinary income tax on the money, a 10% federal penalty, or both.
An automatic way to save
It can be hard to save. Especially if there isn’t much money left after the bills are paid.
Your retirement plan makes it easier to save because it’s automatic. It doesn’t rely on willpower—or having money left over.
Your retirement plan makes it easier to save because it’s automatic. It doesn’t rely on willpower—or having money left over.
Start saving now
When you enroll in your retirement plan, you’ll be asked how much of your pay you want to save.
Vanguard suggests saving 12% to 15% of your pay each year for retirement. This includes any contributions your employer might make.
Few people save that much to start. What’s important is to start saving now—and to contribute enough to get all of your employer’s contributions. You can save up to the contribution limits each year.
Vanguard suggests saving 12% to 15% of your pay each year for retirement. This includes any contributions your employer might make.
Few people save that much to start. What’s important is to start saving now—and to contribute enough to get all of your employer’s contributions. You can save up to the contribution limits each year.
Raise your savings each year
You can change how much you save at any time.
Your plan may have a feature that can increase your savings each year. If so, consider signing up for it. If you do, Vanguard will automatically increase your contribution rate by the amount you set.
Your plan may have a feature that can increase your savings each year. If so, consider signing up for it. If you do, Vanguard will automatically increase your contribution rate by the amount you set.
A way to invest your money
Employer plans can offer many investments.
How do you choose?
For goals like retirement, Vanguard suggests investing in both stocks and bonds.
You can get a start with our Investor Questionnaire. The tool can help you decide how to split your savings.
Or you can choose a target-date investment. This single investment includes a mix of stock and bond funds.
You can get a start with our Investor Questionnaire. The tool can help you decide how to split your savings.
Or you can choose a target-date investment. This single investment includes a mix of stock and bond funds.
Target-date investments are popular
Target-date investments are now the most popular options in retirement plans, partly because of their convenience. Each investment rebalances automatically. It gradually gets more conservative as you approach and enter retirement.
A way to take care of the ones you love
Your property, including your financial assets, can pass to your heirs in different ways. Learn more about how to leave your estate to your loved ones.
Whenever you invest, there’s a chance you could lose the money.
Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date. Bond funds are made up of IOUs, primarily from companies or governments. These funds risk losing value if the debt isn’t repaid on time. Also, bond prices can drop when interest rates rise or the issuer’s reputation suffers.