The ABCs of Retirement Planning
If you’re like 49% of working Americans, you’re not feeling terribly confident about the money you have tucked away for retirement. In fact, for many, the idea of saving enough is so daunting that they continually put off the process of calculating how much they’ll need to have saved in order to live comfortably during retirement. Less than half of workers have actually sat down to crunch the numbers and figure out a retirement goal.
Once you’ve estimated what you need, it’s essential to familiarize yourself with the options for putting money away. Depending on where you work, there are a couple of choices as far as savings plans go. Use this glossary to get IRAs straight from 457s, 401(k)s and all the other acronyms of retirement.
401(k) Plans are retirement savings sponsored by your employer. These are pretty common, so they are the plan type you’re likely to hear the most about.
403(b) Plans are for employees of non-profit organizations and pubic education institutions.
457 Plans are for state and municipal employees.
Annuities are insurance products that pay out income gradually. You can invest in an annuity while you’re still working and then get income during retirement either in one lump some or in spread out payments.
Defined Benefit Plans are retirement accounts that your employer handles. They contribute money and also decide where to invest it. When you retire you’ll get a payout based on how much money you made and how long you worked there.
Estate Planning is the process of deciding how your assets – including money and property – will be distributed after you die.
IRAs are retirement plans that offer tax benefits now rather than later. Any contributions you make may be tax-deductible.
Roth IRAs are retirement plans that offer tax benefits later. Any withdrawals you make during retirement may be tax-free.
Pensions are retirement accounts maintained by the employer. When the employee retires, they can choose between a lump sum or monthly payments for their payout.
SARSEP Plans are simplified employee pension plans (see below) that were set up before 1997. These types of plans can no longer be set up.
SEP IRAs, or Simplified Employee Pensions, are individual retirement accounts for the self-employed and small business owners.
SIMPLE IRA stands for Savings Incentive Match Plan for Employees. This is another type of IRA for small businesses and self-employed. Employees can make their own contributions, and the employer is required to contribute on behalf of employees.
Social Security is a federal program funded through payroll taxes. Money is placed into the Social Security Trust Fund and payments are managed by the government. Depending on the year you were born, you may start receiving Social Security benefits between the ages of 62 and 67.
Thrift Savings Plans are for employees of the federal government. These work a lot like 401(k) plans.
Trusts are legal documents that let you specify conditions on how your assets are distributed when you die. For example, you can state that your children will receive your money once they reach a specified age.
Wills are legal documents that let you state who gets your money and belongings when you die. If you don’t have a will, the courts will determine what happens to your assets.
Definitions sourced from IRS.gov and money.cnn.com.