Retirement Plans - Five Things You Need to Know to Start Saving Now

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There are many different types of retirement savings plans. The most popular plans are individual retirement accounts (IRA), defined contribution plans (401(k), 403(b), and 457(b) plans), and defined benefit plans (traditional pension plans). Most U.S.-based employers offer a defined contribution plan like a 401(k) plan.

If these combinations of numbers and letters leave you feeling fearful and confused, get over it. Do not let fear of numbers keep you from saving. Retirement programs have lots of financial jargon and concepts, but you do not need to understand most of them to start saving. Your understanding will grow over time.

Click on the dark blue tab to read our five (5) basic retirement plan primers. Increase your knowledge and get started saving now.

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Primer #1

Enroll

The method of enrolling in a retirement savings plan may have gone from paper to computer. However, the process is still the same.

You have to provide basic personal information like name, address, and marital status.

Then you have to decide how much money you want to put into your account regularly (this called your contribution).

Next, you need to choose your investments based on a list of options provided to you (there are online advisor services, like Jemstep, that will help you choose your investments or analyze the ones you choose yourself).

Finally, you must choose a beneficiary. This person or entity will receive your retirement benefits only if you pass away before receiving all of them.

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Primer #2

Contribute

Deciding how much of your income to put into a retirement savings plan is one of the most challenging yet important decisions you will ever make. Contribute too little, and you may outlive your savings. Contribute too much, and you may feel deprived in your preretirement years.

Put in the maximum you can to receive your company's retirement plan match
Put in as much as you can without going into debt in other areas of your life
Put in an amount throughout your work life

Remember, most retirement plans allow you to change your contribution amount anytime. Also, remember that federal law and plan provisions may restrict your yearly contribution.

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Primer #3

Fees and Expenses

Retirement plans cost money to operate. The plans must pay administrative and investment fees and other expenses. Someone has to make sure your contributions are correctly placed into your account. Also, the website that allows you to enroll and make changes cost money to offer and maintain. And there are costs to purchase, sell and manage your investments.

Bottom line,

these costs add up over time,
they are deducted from your investment account balance,
and they reduce your overall retirement savings.

You should know that these fees exist and how they affect your savings. Asks your retirement plan administrator what they are doing to keep the fees as low as possible so that you can save as much as possible for your retirement.

You can use an online service like Brightscope to see how your retirement plan stacks up to similar employers. Brightscope reviews plan fees and other factors to determine a company’s retirement plan rating.

Related article: Flip The Script on 401(k) Fee Disclosure Notices

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Primer #4

Investment Advice

Years ago, when most employers offered traditional pension plans, you did not need investment advice. But now that has changed. Most employers provide defined contribution retirement savings plans that require you to make your own investment choices. Fortunately, many of these plans come with some level of investment advice service. More and more employers are contracting with financial professionals who can help you decide which investments your plan offers will best help you meet your goals. Take advantage of this type of service. If your plan does not offer the service, ask your employer to offer it. You can also use an online advisor service or hire a human investment advisor for assistance in choosing your investments.

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Primer #5

Social Security Retirement Benefits

For many working Americans, Social Security retirement income will make up a significant portion of their retirement savings.

You can receive about 40% of your preretirement wages from Social Security. This is typically more than you contributed to the program.
You can receive Social Security retirement income as early as 62. The benefits will be about 25% less than if you had waited until your full or normal retirement age.
You will receive 100% of your calculated benefit amount if you wait until you reach your full or normal retirement age.
Your benefits will increase about 8% each year you delay your retirement past full or normal retirement age. There is no increase in benefit once you reach age 70.

You can obtain a Social Security income projection statement from their website (www.ssa.gov). View your statement each year. Also, check if your 401(k) or other retirement plan provides a similar income projection statement. If not, ask them to do so. You must know what income you may expect from each retirement savings program you participate in. But keep in mind that income projection statements are estimates. Your actual retirement benefits may be more or less than the projection.

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THIS TOOL DOES NOT PROVIDE ADVICE. It is for general informational purposes and does not address individual circumstances.