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The retirement savings landscape is increasingly cluttered. It includes Social Security, different types of employer-sponsored plans, individual retirement accounts, and taxable accounts.
The next few classes are going to cover the retirement-savings terrain. We'll explore two of the most-popular types of employer-sponsored retirement plans, the 401(k) and the 403(b). Afterward, we'll compare traditional and Roth IRAs.
We'll begin with what is quite possibly the easiest money in retirement planning: the 401(k) plan. If your company offers a 401(k) plan, contribute to it. With a little effort, the payoff can be considerable.401(k) Plans Versus Traditional Pensions
The pension is fast becoming a thing of the past. These days, more and more companies are adopting cryptically titled retirement packages called 401(k) plans.
A 401(k) plan (as well as its cousin, the 403(b) plan) is a defined contribution plan. This means that the amount you receive in retirement is based on the amount that you (and your employer, if there's a match available) contribute to the plan, in addition to the investment returns you earn on those contributions.
In contrast, "defined benefit" plans, such as pensions, generally pay a guaranteed sum based on your wages and years of service.
As investment programs, 401(k) plans have several great features:
They invest pretax dollars.
You don't pay taxes on investment gains until later.
Every 401(k) plan has an excruciating legal description, called the Plan Document. No need to pore over that. Focus instead on the Summary Plan Description (SPD). That document explains how your plan operates.
Look for the answers to these questions:
What do people do when they don't know which investment options to pick? They choose them all.
That's a bad idea. Your 401(k) plan isn't like a smorgasbord where you can try a little of everything. It's important that you understand your investment choices and that you choose the ones that will allow you to reach your investment goal.
Many 401(k) plan sponsors offer retirement-planning tools. This can make finding the right mix of funds for your retirement plan easy.
All you typically have to do is answer some questions about your age, how much you're currently contributing to your retirement plan, your income goals in retirement, whether you'd be willing to work part time when retired, and a few questions that will help the program gauge how much risk you're comfortable with.
Retirement-planning tools can analyze that information and the funds your retirement plan offers, weighing their strategies, risks and returns, and expenses. They often give you the odds that you will meet your goal and recommend a mix of funds to get you there (put 45% in Fund Z, 23% in Fund Y, and so on). If the chances of you achieving your goal are poor, you will have the option of revising some of your parameters to improve your odds.
|1||The 401(k) plan is a type of:|
|a.||defined contribution plan|
|b.||defined benefit plan|
|2||How do you invest in a 401(k) plan?|
|a.||You write a check to your 401(k) plan provider each month|
|b.||Your employer automatically deducts your contribution from your pay|
|c.||You don't invest any of your salary in a 401(k) plan--your employer throws in all the money|
|3||What are the tax advantages of a 401(k) plan?|
|a.||You won't pay taxes on any investment gains until you begin withdrawing from your plan|
|b.||You invest with pre-tax dollars, which saves you money on your current income taxes|
|c.||Both A and B|
|4||What's the minimum amount you should try to invest in your 401(k) plan?|
|b.||The legal limit|
|c.||At least enough to get the employer match|
|5||How should you choose from among your plan options?|
|a.||Choose options that will allow you to reach your financial goal|
|b.||Put some money in each of your options|
|c.||Invest only in stock funds|
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