Do You Need a Private Retirement Plan? We Look at the Facts

Do You Need a Private Retirement Plan? We Look at the Facts

In the United States today, 60 percent of the private workforce has access to retirement plans. Direct contribution (DC) models dominate the landscape of occupational pensions, covering approximately 43 percent of the workforce.

The most popular form of DC plan is the 401(k) plan. This form of retirement savings vehicle enables employees to make tax-deferred contributions to their retirement savings accounts directly from their salaries.

In addition, some organizations match contributions, enabling retirement savers to boost their retirement savings considerably. But for employees whose companies do not offer a retirement plan, are contributions to a private retirement account necessary, or will Social Security cover your post-retirement financial needs? Here’s what you need to know:

Social Security Alone Is Likely to Be Insufficient

While it may be possible to get by on state funds alone, many people significantly underestimate how much money they will need to maintain a comfortable lifestyle in retirement. With the average monthly retirement benefit falling at just over $1,400 in 2019, those approaching retirement without the benefit of a nest egg may need to live quite frugally.

The US Social Security Administration estimates that 44 percent of single seniors and 21 percent of married couples rely on Social Security payments for at least 90 percent of their incomes. Those who postpone drawing Social Security pension payments until the age of 70 benefit from an 8 percent increase for each year they wait beyond their full retirement age. However, for many individuals, this is simply not an option.

Health Care Costs in Retirement Are Likely to Be Substantial

Many seniors receive support from Medicare, Medicaid, and Extra Help programs, benefiting from contributions to their post-retirement healthcare costs. Nevertheless, it is easy for people to underestimate how much their post-retirement health care costs will be. This amount can vary greatly depending on where they retire, how healthy they are, and how long they live.

According to Fidelity, an average couple retiring at the age of 65 in 2020 could need up to $275,000 in post-tax savings to cover health care expenses alone. As employees approach retirement, they face significant decisions, including when to stop working, when to draw Social Security, how to generate a cash flow and, crucially, how to finance health care.

Therefore, the shorter answer is yes, you probably do need to contribute to a private retirement account. There are many excuses to postpone saving for retirement, but there are even more reasons to start. For high-income US taxpayers, retirement savings accounts confer vast tax advantages, reduce tax liabilities, and ultimately increase the amount of money available in retirement.

Malta Pension Plans Provide Both Pre- and Post-Retirement Tax Benefits

A Malta Pension Plan (MPP) is a particularly effective way of reducing pre- and post-retirement tax burdens. This form of retirement savings vehicle has grown increasingly popular in recent years, thanks to preferential tax treatment created by the US-Malta Tax Treaty, which became effective in 2011.

MPPs have significant tax-saving advantages over Roth IRAs. One of the biggest limitations of Roth IRAs is that they are only available to US taxpayers earning less than the specified amount. With an MPP, there is effectively no cap on earnings.

In addition, non-cash assets can be contributed directly to an MPP without being liquidated first. Little wonder financial experts across America are hailing MPPs as the new, supercharged Roth IRA, offering high income US taxpayers hugely improved tax-saving potential.