Retiring Soon? Here Are Seven Terms You Should Know

Retirement is a period in life that requires a lot of planning. Retirement is not only about enjoying life after you have hung up your boots. It comes with many issues that need to address, and definitely, one of the most important ones is your savings.

While trying to save for your retired life, you will come across a host of retirement terms you will have no idea of. It’s pretty normal for you to find them unfamiliar since you are new to this phase. Below are seven of these terms you need to be familiar with before you retire.

401(k)

This particular retirement savings plan happens to be the most popular one. According to this plan, you should put forward a portion of your paychecks to the 401(k) plan. You should choose where you would be investing and not shell out taxes on your earnings or contribution until the time you initiate garnering the withdrawals. In 2021, the contribution limits to the 401(k) plan are $19,500 every year. For people who are 50 or above, the contribution limits stand at $26,000.

Matching Contributions

Matching contributions are an incentive that you get from your employer. This is an encouragement on their part so that you can accumulate ample savings for your retirement. When your employer contributes towards your 401(k), they deposit an amount that’s almost identical to your contribution each month.

The amount is up to a fixed percentage of the salary you receive. For instance, an employer will offer the same amount of your contribution to 3% of your take home. Therefore, if you rake in $50,000 at the end of each year, the employer would deposit more or less an amount of $1500 of your contributions towards your 401(k) plan. Just because a fixed formula is not there, you should talk with your company.

Mutual Funds

Almost similar to exchange-traded funds or ETF, mutual funds gather money from the investors and utilize the amount to buy a wide range of stocks, short-term debt, or bonds. Since you are purchasing a range of securities and not making investments in one particular company, mutual funds are ideal for instant diversification.

With regards to mutual funds, the securities are selected and traded by a pool of experts. You might have heard about index funds. These are extremely popular mutual funds due to the low costs and amazing returns they offer. You can buy shares of mutual funds and index funds in an IRA or a 401(k)

Rollover IRA

You fund the rollover IRA with the money you have in your 401(k) or any other retirement account that your employer sponsors. This usually happens when you quit your job and don’t want to go with limited investment options or high plan fees. You might also move the funds from your 401(k) to an IRA if you want to cut down the number of retirement accounts you have in your name.

Roth 401(k)

Through Roth 401(k), you get special tax advantages. Quite in contrast with the conventional 401(k) accounts, where you donate contributions entirely on a pre-tax basis, you make contributions to Roth 401(k) with the sum you have shelled out taxes on. Since upfront tax deduction is not something you need to consider here, you don’t need to pay taxes on your withdrawals and earnings once you attain 59 and a half.

Self-Directed IRA

SDIRA or a self-directed IRA happens to be a retirement plan to make investments quite extensively. Under selected IRAs, you can invest in Bitcoin, real estate, and even precious metals such as silver and gold. Self-directed IRAs can be Roth retirement accounts or conventional retirement accounts. However, more risks and more fees are associated with SDIRA in comparison to a normal IRA.

Social Security

This is a pension plan that benefits those who have taken retirement and the members of their families. It substitutes a part of your wages based on your highest three and half decades of income and the time when you start getting benefit payments.

These were some basic retirement terms that you need to have a thorough knowledge of. Some important terms like Solo 401(k), require minimum distributions, individual retirement account, exchange-traded funds, etc. You will get an overall idea over the internet.