19 Retirement Planning Terms to Master Today

retirement planning

Your financial future is pretty much in your hands.

When you save for retirement, you should save early and save often. Without a nest egg, there is a good chance your “golden years” will be rather tarnished.

As you get started, though, it’s easy to become discouraged by all the jargon. Here is a handy list of common retirement planning terms you are likely to encounter:

1. 401k

A 401k is a tax-advantaged retirement planning account usually made available through an employer. In many cases, you receive a tax deduction for your contributions.

Your contributions are automatically taken from your paycheck, so you don’t miss the money. Your nest egg grows until you reach retirement, at which point you can start making withdrawals.

2. Annuity

This is a regular payment made to you for a set period of time. You usually buy annuities from a life insurance company. You either make regular payments for years, or you purchase an annuity with one large lump sum.

The payout is based on how much you have put into the annuity, and how long you wish to receive payments. It’s important to watch out for fees, since they can be fairly steep with annuities.

3. Contribution

This is the amount of money you add to your retirement plan.

4. Defined benefit plan

Defined benefit retirement plans pay out according to a formula. You receive a regular, guaranteed payout. A formula that includes how long you have worked for a company, as well as your final salary, is used to help determine the payout.

Pensions are an example of a defined benefit plan. There are fewer private companies offering pensions for retirement planning today. In many cases, you need to work for a government entity to get a pension.

5. Defined contribution plan

Instead of offering defined benefit plans, many companies offer defined contribution retirement plans. Rather than a set payout, you make a set contribution to your plan.

This contribution might be either a dollar amount or a percentage of your paycheck. Some employers are also willing to match your contribution. A 401k is an example of a defined contribution plan.

6. Distribution

This is the money you take out of your retirement account after you reach the appropriate age.

7. Employer match

The company you work for might be willing to contribute to your retirement planning efforts by matching a portion of your contribution. This is free money that your company adds to your retirement account. It is yours for the future.

8. Expense ratio

This measures what it costs an investment company to manage a mutual fund, and it reduces the returns on your investments. You are likely to pay a higher expense ratio for actively managed funds than for index funds or ETFs.

9. Fees

No matter what retirement plan you have, there will be fees involved. Pay attention to the types of fees you are charged.

It is common to see an administration fee of between one and three percent. You also need to pay attention to the fees that come with the investment options in your employer’s plan. Many of the funds come with expense ratios.

If you aren’t happy with the fees, talk to your HR department and encourage them to find a new plan administrator that offers options with lower fees.

10. Fund

Chances are, if you’ve looked through your employer’s retirement planning options, you’ve seen funds listed. A fund is a collection of investments that share certain characteristics. Most retirement plans offer a selection of stock funds and bond funds.

You can use these funds to build a portfolio that works for you. Pay attention to the expense ratios and administrative fees involved with the funds you choose.

11. Health savings account (HSA)

Even though it’s not technically a retirement plan, a health savings account (HSA) can still be a help to your retirement. You make contributions to this plan and receive a tax deduction. Later, you can withdraw the money tax-free as long as you use it for qualified healthcare costs.

The HSA acts with rules similar to an IRA, once you reach a certain age.

12. Inflation

This is the increase in prices over time, or the reduction in the real value of your money. Inflation can make it difficult to build a retirement nest egg designed to last.

13. Individual retirement account (IRA)

An individual retirement account (IRA) is often used by those who don’t have access to a retirement plan at their job. However, some employers offer IRAs instead of 401ks.

You can choose either a tax-deferred (Traditional) IRA, or an IRA that offers tax-free growth (Roth). There are different types of IRAs for self-employed workers and business owners, including SEP and SIMPLE accounts.

14. Required minimum distribution (RMD)

If you have a 401k or an IRA, at some point you will be required to make withdrawals from your account.

You start taking RMDs after turning 70½. The amount you are required to take depends on the size of your account, current life expectancy, and other factors. There are tax implications as well, so it’s important to be careful.

Understanding how RMDs work is an important part of retirement planning, especially as you get older. You’ll need to figure out when to start drawing from your account and how to coordinate with Social Security.

It’s a good idea to talk to a knowledgeable financial professional for help managing your RMDs.

15. Rollover

When you move assets from one account to another, it’s called a rollover. This is a common process when you move your money from a 401k to an IRA. Make sure you make a direct transfer from one account to another.

16. Social Security

This is the retirement supplement plan set up by the U.S. government. It is funded by payroll taxes. It is not an entitlement program, since you pay into the system.

Your payout is based on how much you put in, when you start receiving benefits, and how long you are expected to live.

17. Target date fund

Some funds in your retirement plan might be target date. These funds are designed to automatically change the percentage of bonds and stocks as you get close to retirement. The strategy used in these funds is based on the year you want to retire.

18. Tax-deferred

Tax-deferred retirement plans are designed to give you a deduction now. These are Traditional IRAs and 401ks, where you make your contributions with pre-tax dollars. This lowers your taxable income and results in a smaller tax bill today.

However, when you withdraw money from your retirement account later, you are taxed on the amount you take out.

19. Tax-free growth

Retirement plans that feature after-tax contributions. Even though you don’t get a tax deduction today, your money grows tax-free. This means you don’t pay taxes when you take distributions from your account. Roth accounts are tax-free growth accounts.

Now that you’ve mastered these basic retirement planning terms, you can create a strategy with confidence. Here’s a complete guide to help you start saving for the future.

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