What Is the Purpose of a Retirement Plan?

The purpose of a retirement plan is to provide financial stability so people can leave their full-time jobs at retirement. Planning has become quite a challenge because of the rising cost of living--especially health care. According to a 2009 Saturday Evening Post article, the number of people older than 65 in the work force had jumped from 3.8 million to 6.1 million in just 10 years.

A retirement plan includes a variety of savings tools such as IRAs, 401ks, annuities, mutual funds and other investments. These financial instruments have different advantages and disadvantages and should be chosen carefully, based on expected needs, tolerance for risk, and available funds.

Financial planners usually estimate that you will need about three-fourths of your pre-retirement income per year for however many years you plan to live. For example, if you were making $50,000 per year and you planned to live for 20 years after retiring, you would need about $750,000 stashed away for retirement.

IRA stands for individual retirement account. The advantages of using one of these plans is reduced tax liability. There are two types of IRAs: Roth and traditional. Roth IRAs allow the money to grow and be withdrawn tax free. Money contributed to a traditional IRA is tax-deductible the year it is contributed.

These are retirement plans sponsored through an employer. Often, an employer will match, at least in part, money that is contributed. These funds are usually tax-deductible in the year they are contributed.

These are, in essence, a bundle of stocks bought together to minimize risk. The bundles are managed by professional investors who attempt to maximize the return for individual investors over time.