What is retirement?
Retirement is the action or fact of leaving one's job and ceasing to work. Most people save money over time before they retire so that they can survive without having to work and earn money. There is also social security to help retired people earn money.
Social Security
Social security is any government system that provides monetary assistance to people with an inadequate or no income. It was started during the Great Depression when elderly people were found living in the streets. The U.S. government felt ashamed from this and started giving people enough money to survive after they retire. Social security is from the taxed paychecks of employees.
What are some ways of saving up for retirement?
The main ways are Pension Plans and Personal Investments, with many things that branch under each.
Pension Plan - any retirement plan offered to a comapny's employees. There are two different kinds of Pension plans, Defined- benefit plan and defined-contribution plan.
Defined Benefit- the company pays the retiring employee a specific amount each month. It is based on the history of the employee's salary and how long they worked for the company. It is risky for the employer (company) since they have to pay the retired employee even if they don't have enough money to do so;
Because of this, they are not common anymore.
Defined Contribution - The employee chooses to put money into a retirement fund. It is invested on their behalf. The employer (company) may also put money into the investment fund. This is called matching, and the employer will double the amount of what the employee puts into the fund. When the employee retires they can receive the original amount they put in and the return made from the investments. In Defined Contribution the employee takes all risk. Some examples are 401(k) plans, a profit-sharing plan, or an Employee Stock Ownership Plan (ESOP).
http://time.com/money/collection-post/2791222/difference-between-defined-benefit-plan-and-defined-contribution-plan/
Because of this, they are not common anymore.
Defined Contribution - The employee chooses to put money into a retirement fund. It is invested on their behalf. The employer (company) may also put money into the investment fund. This is called matching, and the employer will double the amount of what the employee puts into the fund. When the employee retires they can receive the original amount they put in and the return made from the investments. In Defined Contribution the employee takes all risk. Some examples are 401(k) plans, a profit-sharing plan, or an Employee Stock Ownership Plan (ESOP).
http://time.com/money/collection-post/2791222/difference-between-defined-benefit-plan-and-defined-contribution-plan/
Personal Investment- a financial investment by a person, rather than by a business or a financial institution, or these investments considered as a whole.
Individual Retirement Account (IRA) - a personal savings plan that lets workers and their spouses set aside money for retirement. They are limited (by the law) to give specified dollar amounts per year. There are two different kinds, Traditional and Roth.
Traditional - tax is deducted from the money when it is drawn into retirement. Since there is the simple tax rule, the more you make the more they take, and you have a smaller income at the time of retirement, you are taxed at a lower rate compared to Roth IRA. Your income level and whether or not your employer's retirement plan (Pension Plan) will factor on if you are taxed or not, but even when you're not getting taxed you can still make different nondeductible contributions. The yearly contributions made to an IRA can be made until the age of 70.5 , which is also the age when withdrawals have to start. Withdrawals made before age 59.5 usually come with a penalty.
Roth - the tax contributions aren't deductible, but the earnings are tax-free. Once the account is at least 5 years old, withdrawals become tax and penalty free if you are at least the age of 59.5 or use the money to become a first-time homeowner.
https://www.fool.com/retirement/iras/traditional-vs-roth.aspx
Traditional - tax is deducted from the money when it is drawn into retirement. Since there is the simple tax rule, the more you make the more they take, and you have a smaller income at the time of retirement, you are taxed at a lower rate compared to Roth IRA. Your income level and whether or not your employer's retirement plan (Pension Plan) will factor on if you are taxed or not, but even when you're not getting taxed you can still make different nondeductible contributions. The yearly contributions made to an IRA can be made until the age of 70.5 , which is also the age when withdrawals have to start. Withdrawals made before age 59.5 usually come with a penalty.
Roth - the tax contributions aren't deductible, but the earnings are tax-free. Once the account is at least 5 years old, withdrawals become tax and penalty free if you are at least the age of 59.5 or use the money to become a first-time homeowner.
https://www.fool.com/retirement/iras/traditional-vs-roth.aspx