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Retirement Planning Accounts
Retirement planning accounts are funds that will ultimately provide an income to persons during their retirement. Funds can be in the form of lump sums, or of monthly pension income. Retirement plans are established by employers, insurance companies, trade unions and by national governments. The ultimate objective of these plans is to make as large a proportion of the retired public financially self-sufficient and less dependent on government social security support.
Retirement funds generally exist of two forms – defined benefit, and defined contribution. The former will provide the contributor with a specific level of retirement benefit based on the number of years that contributions have been made and level of a person’s salary. The latter fund’s performance will only be known once the person retires and is more likely to reflect prevailing economic indices, particularly the performance of interest rates and bond and stock markets.
Retirement plans in the U.S. are commonly known as Individual Retirement Accounts, or IRA’s. These involve the investment decisions about how the accumulated funds being made by the fund’s host – normally a person’s employer or government. In the United Kingdom, retirement funds are normally called pension funds, and in Australia they are called superannuation plans. The actual investment vehicles chosen by the retirement fund managers are normally managed or mutual funds as well as securities from the international bond and stock markets.
The success of retirement plans such as IRA’s is largely due to the tax advantage with which they are associated. These exist for both employer and employee, making contributions to retirement funds a win-win situation.
In recent years, retirement funds have been involved with a fair amount of controversy. During periods of low interest rates and highly volatile stock and bond markets, many retirement fund portfolio managers have been unable to perform much better than prevailing rates of inflation. This has resulted in the monies collected by retirement funds being worth less in real terms than the initial investment made by retirement fund contributors. However, there can be no substitute for saving for retirement, and such controversy is likely to dissipate once higher prevailing real investment opportunities return.
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