Even if you’re just starting your first real job—actually, especially if you’re just starting your first real job—it’s time to start thinking about retiring. That’s not a comment on how motivated—or unmotivated—you are, or a suggestion that you should wish your life away. It’s just reality.
That’s because you, like many people, will be responsible for supporting your- self during the 30 or 40 years you can expect to live after you retire. To do that, you need a source of income that will stretch further than the safety net of Social Security and be more reliable than winning the lottery.
Some—but increasingly few— employers offer traditional pensions, which pay you retirement income based on your final salary and time on the job. Others contribute to a cash balance, profit sharing, or other plan on your behalf. But most employers offer you, instead, the opportunity to participate in a tax-advantaged salary reduction plan, such as a 401(k).
401(k) plans are the most common, and best known, employer sponsored salary reduction plans. But they’re not the only ones. If you work for a not-for-profit organization such as a school or college, a hospital, a cultural institution, or a charitable organization, your employer may offer a 403(b) plan, sometimes known as a tax-deferred annuity (TDA).
Similarly, the plan a state or municipal government offers may be a 457 plan, while federal government departments and agencies provide a thrift savings plan. And if you work for a small company—one with fewer than 100 employees—you may be part of a SIMPLE plan, an acronym for Savings Incentive Match Plan for Employees.
If your employer offers a traditional 401(k) or 403(b), you may also be offered a Roth 401(k) or Roth 403(b). You defer after-tax income but your withdrawals will be tax-free if you’re at least 591⁄2 and your account has been open at least five years when you retire.
Contributions from the book It’s Your Financial Life in this press release are used with permission from Light Bulb Press.