Retirement can be a complex stage of life, and the myriad of new terms that accompany it can be overwhelming. Here are just a few of the most vital concepts you should know when entering this exciting new chapter of your life.
Age of retirement
This term can be deceptively complex. On one hand, you can retire at whatever age you want—call it quits at 50 if you can, or work well into your 80s if that suits you. When it comes to Social Security benefits, things get a bit more specific. Although technically you qualify at 62, your benefits may be permanently cut by as much as 25 percent if you opt to take them at this age. You can claim full benefits at 66, but those who wait until 70 can get an additional 7 or 8 percent a year.
401(k)
If your workplace has a 401(k), it is essential to take advantage of it. You can contribute pretax dollars, usually directly from your paycheck, without blinking an eye. The pool of money you set aside now brings down your current taxable income, and you won’t pay taxes until you take it out after retirement. You may also be offered the choice of a Roth 401(k), which takes taxes out on contributions, but retirement withdrawals are tax-free.
Some employers may support both options, but if it comes down to a choice between the traditional and Roth versions, your decision will rest on a prediction of where you see your income in the future. If you see your tax rate going down, then the traditional is for you. If you think you’ll be in a higher bracket, then a Roth may make more sense.
Match
Another reason to opt into your employer’s 401(k) is the potential for the company to match your contributions. The specifics vary by organization—some put in money whether or not you contribute, some require contributions in order to match, some begin matching right away, some wait until you’ve worked there for a certain amount of time, some have generous matches, and some leave much to be desired.
Vesting schedule
Many 401(k) plans have a waiting period, known as a vesting schedule, before you can collect any employer-contributed funds. The longer your term of service, the greater percentage of the employer's funds are vested and available to you should you move on to another job (or are fired).
When considering a position at a new company, inquire about its vesting schedule to be sure it fits your ideal timeline.
Rollover
When you make a career change, that shiny new job may come with a shiny new 401(k). What to do with your lonely old 401(k)? There are a couple of ways to take it with you. You can roll it over into your new 401(k) or into an IRA. The latter option may make sense if your new company’s 401(k) has higher fees or inferior investment choices.
IRA
An IRA (short for individual retirement account) is a place to invest money specifically for retirement. Much like a workplace 401(k), there are regular and Roth versions, the former of which allows contributions of pretax dollars before retirement, and the latter tax-free withdrawals after retirement.
Annuity
Annuities are contracts sold by life insurance companies, most often used as long-term investments for retirement, which accumulate tax-deferred savings. They are immune to market fluctuations and so provide a safety net of sorts should your savings run dry.
Compound interest
Arguably the most powerful incentive to start saving early for retirement, compound interest is the cumulative effect of revenue generated off the principal and its earned interest. As your wealth accumulates in a sort of snowball-down-a-hill manner, a greater percentage of your personal savings can stay in the bank (or under the mattress, if you prefer).
Trust
Quite simply, a trust is a legal structure that allows you to dictate what should happen to your assets in the (hopefully unlikely) event that you pass away.
Beneficiary
A person or entity will inherit these assets after you pass away. If they refuse the inheritance, can’t be found, or have died themselves, then a series of secondary or contingent beneficiaries are called upon to assume responsibility for the assets.
Know the lingo? You’re ready to go
The retirement process, while daunting at first, gets easier once you know the lingo. From there, you may feel ready to jump in with both feet, or you may need a helping hand to keep things moving. Go deeper into the details with our Popular Retirement Plans e-book.