Chances are, you came here because your employer offers some sort of retirement savings plan, specifically a 401k, and you’re simply uncertain as to what to do or how to invest. Therefore, it may be beneficial for you to understand the several different types of savings plans offered by various employers; These plans can be split into a couple of different major categories – Defined Contributions and Defined Benefits. Defined contributions are things such as your 401k, where you are responsible for managing how your money is invested. Defined benefits are like pension plans, where your employer guarantees you a set amount of money upon retirement, to be paid in fixed increments (similar to social security, but this is managed privately instead of by the government) and managed by the employer. Defined benefit plans, or pension plans, have been disappearing over the years, and in fact, very few employers offer these types of benefits any longer. This means, it’s your responsibility to ensure you set money aside and invest it to ensure you have money for retirement. Or you could just work until you’re 80, it’s your choice.
Other defined contribution plans include 403(b)s (similar to 401(k)s, however, these are only used by non-profit orgainzations), 457 plans (available to state and municipal empoyees and similar to 401(k)s and 403(b)s, however these allow larger catch-up adjustments), and SIMPLEs (Savings Incentive Match Plans for Employees for organizations with less than 100 employees).
Some employers do not offer any of the above, in which many people choose to “create their own” by using IRAs (individual retirement accounts). You can invest in a “Traditional IRA”(pre-tax dollars) or a “Roth IRA” (invest with after tax dollars). Here is a great article on Traditional IRAs. I will expand upon this subject in my later lessons.
The important thing to take away from this lesson is that pension plans have been replaced by 401k plans and similar, companies are no longer doing the investing for you, it’s in your hands now. You better know what you’re doing or you could end up losing money for no reason.
Keep going, you’re nearly 1/3 the way through this mini-series! Next, Learn about the different types of investments you can buy (stocks, bonds, cash, real estate, etc.).
Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.