As you prepare for retirement, you’ll face a lot of planning and decisions. You want to make the best moves for your future, but you may get a little confused by some of the unfamiliar jargon that relates to retirement.
A financial professional can help guide you and understand any retirement or investment plans that you may have questions about. But this guide can help you brush up on some of the language so you’re prepared for the conversation and ready to dive into the important information.
401(k) — a retirement savings program that many employers offer. Employees can regularly contribute to these accounts and some employers match up to a certain percent of contributions. Most 401(k)s don’t charge income tax on your contributions until you withdraw from the account.
403(b) — a retirement plan that eligible public schools, tax-exempt organizations and religious organizations can offer; it allows their employees to contribute money to a tax-deferred retirement account.
457(b) — a deferred compensation plan that government and tax-exempt employers can offer; it allows their employees to contribute money to a tax-deferred retirement account.
401(a) — an additional retirement plan funded by an eligible employee’s special pay (termination pay), which is compensation other than regular salary or wages accumulated by an employee and converted to a lump-sum amount at termination of employment. Special pay may include unused annual leave, unused sick leave or other lump-sum special pay that is eligible for contribution into the 401(a).
Annuity — a contract that lets an person make a lump sum payment or regular contributions to an insurance company to get regular disbursements of income during the time of the investor’s choosing, usually retirement.
Bonds — investors loan money to a company or government agency, then the organization repays the investor over time with interest payments.
Deferred Retirement Option Plan (DROP) — In exchange for continuing to work past your eligible retirement age, an employer will set aside annual lump sum payments into an interest-bearing account. DROP allows you to effectively retire under the FRS Pension Plan. You begin accumulating your retirement benefits while delaying your termination for up to 60 months from the date you first reach your normal retirement date.
Estate planning — the process of creating a legal document that gives instructions for managing and allocating your assets after you pass away.
IRA — a traditional IRA is a retirement savings account with tax advantages. Contributions may be fully or partially tax-deductible and usually don’t get taxed until you withdraw them.
Medicare — a federal system of health insurance for people over 65 years of age and for certain younger people with disabilities.
Mutual funds — investment programs that shareholders fund. The investors pool money into diversified holdings that are managed professionally.
Roth 403(b) — a retirement plan that you pay taxes upfront when your money goes into the plan. Then you will enjoy tax-free withdrawals-as long as you are at least 59 ½, and do not take withdrawals from your Roth account for at least five years after your first Roth contribution is made to the plan.
Roth 457(b) — a retirement plan that pay taxes upfront when your money goes into the plan. Then you will enjoy tax-free withdrawals - as long as you are at least 59 ½, and do not take withdrawals from your Roth account for at least five years after your first Roth contribution is made to the plan.
Roth IRA — similar to a traditional IRA, but there are a few key differences. Unlike a traditional IRA, a Roth IRA doesn’t have age limits. However, there are limits to eligible compensation. Roth IRAs do not provide a tax break for contributions, but earnings and withdrawals are usually tax-free.
Social Security — monthly check that replaces part of your income when you reduce your hours or stop working altogether. It may not replace all your income so it's best to identify other ways to pay for your monthly expenses as you age.
Stocks — investors that purchase an individual stock basically own a piece of a business. So the investment will have profits and losses based on how the business performs. Investors can even give opinions on business decisions with shareholder meeting votes.
Vested — this term refers to the employer match contributions of a retirement plan. “Fully vested” means the employee can keep all of their employer’s contributions after leaving the company. When employees aren’t fully vested, they can only keep part or sometimes none of their employer’s past contributions, depending on their rules.
It’s never too early to start making your retirement plan. Start your retirement planning or get a second opinion on your current plan by getting started with a financial professional today.