So I got a great answer to my question on how to become more financially responsible and fiscally secure, but one of the suggestions was to place some of my earnings into a retirement account. I'm not one for the idea of retirement, but I would like to have a substantial savings that would function similar to a retirement fund.

Could someone shed some light on and differentiate between a retirement account and alternative savings plans? Btw, Im in my late 20s with no real financial burdens or income.

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    A country tag would be very helpful to include because retirement plans are governed by very different rules in different countries. Also, while being young and Pennywise is undoubtedly very wonderful, be sure that you do not become Poundfoolish by obstinately refusing to contemplate the possibility of retirement, too far distant in the future though it might seem now. Jul 21, 2013 at 0:26
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    Re: "I'm not one for the idea of retirement" .. are you sure you'll always feel that way? Jul 21, 2013 at 0:45
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    "I'm in my late 20s with no real financial burdens or income." How do you manage expenses without income? Jul 21, 2013 at 1:16
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4 Answers 4


So don't retire. But plan like you will retire. I am sure that some billionaire put some money away into a pension, 401K, or IRA for their retirement when they were young. It turns out they never had to worry about outliving their money.

The next few paragraphs use United States examples.

What happens if you have to retire, but you never saved. All the matching funds you could have collected in a 401K are gone, they disappeared with every paycheck you didn't contribute. Every year you didn't contribute to an IRA can never be replayed.

You gave up the magic of compounding, because you thought you would never want to retire.

If you save but don't need it, you will have more money to play with as you cut back your hours to part time.

If you skip all the plans that make it hard to spend the money until you are 59 1/2, you can still save, but it takes even more discipline to not spend it before you are old.


mhoran answered the headline question, but you asked - Could someone shed some light on and differentiate between a retirement account and alternative savings plans?

Retirement accounts can contain nearly anything that one would consider an investment. (yes, there are exception, not the topic for today). So when one says they have an S&P fund or ETF, and some company issued Bonds, etc, these may or may not be held in a retirement account.

In the US, when we say 'retirement account,' it means a bit more than just an account earmarked for that goal. It's an account, 401(k), 403(b), IRA, etc, that has a special tax status. Money can go in pre-tax, and be withdrawn at retirement when you are in a lower tax bracket. The Roth flavor of 401(k) or IRA lets you deposit post-tax money, and 'never' pay tax on it again, if withdrawn under specific conditions.

In 2013, a single earner pays 25% federal tax on taxable earnings over $36K. But a retiree with exactly $46K in gross income (who then has $10K in standard deduction plus exemption) has a tax of $4950, less than 11% average rate on that withdrawal. This is the effect of the deductions, 10% and 15% brackets.

As with your other question, there's a lot to be said about this topic, no one can answer in one post.

That said, the second benefit of the retirement account is the mental partitioning. I have retirement money, not to be touched, emergency money used for the broken down car or appliance replacement, and other funds it doesn't feel bad to tap for spending, vacations, etc. Nothing a good spreadsheet can't handle, but a good way to keep things physically separate as well.

(I answered as if you are in US, but the answer works if you rename the retirement accounts, eg, Canada has similar tax structure to the US.)


Saving for retirement and actually retiring are 2 different things.
It is always a good idea to keep some money away that you can't easily use. This allows you to create a large amount that acts as buffer for rainy day. Most countries have a special account to save for retirements, apart from giving tax benefits and effect of compounding, there are also laws that protect it from getting attached in case of default. For example if you at some point in time default on an obligation, the funds in normal savings account can be attached by court of law. However in certain countries funds in retirement account cannot be attached by court of law for your obligations. Thus always leaving you with funds.


There is a basic difference between saving for voluntary retirement (i.e. choosing to do things other than work even though you could still work) and the need to save for later in life in general. Regardless of how much you like your job, a time will eventually come when you are no longer able to work, and you will need an alternate source of income to live from at that point. Unfortuately, this is also the time when most people generally have the highest medical bills as well, and may need other services such as long-term nursing home care.

So even if you plan to work as long as possible, a retirement fund is an excellent way to plan for these needs as it is tax-advantaged and many companies offer matching contributions. I would simply recommend that you see "retirement accounts" as a good way to accomplish your goals - you don't have to use them to create a "typical" retirement.

Once you've taken advantages of the match and tax subsidies, you may also wish to consider saving for an annuity. Fees can be high, so you will need to do your homework (generally, you want to wait and buy an immediate annuity), but this is another way to turn savings into guaranteed income once you need to stop working.

Best of luck!

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