Categories of Retirement Savings

Saving for your retirement is an important financial step.

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It's never too late or early to start planning for retirement. Regardless of the type of plan you choose, review your plan regularly and understand all the terms. If you are currently employed, you're probably already contributing to your retirement. Employer retirement plans can also decrease your taxable income. Even if your employer provides a retirement savings plan, it might be beneficial to open your own personal account to increase your available funds.

Defined Benefit Plans

Defined benefit plans are common in the public sector and were common for many years in the private sector, though that is becoming rare. Employees who have these plans receive a certain amount of money per month during their retirement, called a pension. In a defined benefit plan, the amount of money you receive during retirement depends on how long you work for the company and your total earnings before retirement.

Defined Contribution Plans

Unlike a defined benefit plan, the amount of money you receive from a defined contribution plan depends on how much you contributed to your investment account. Types of defined benefit plans include the 401(k), 403(b) and 457 plans. Employees have a good deal of freedom with a defined contribution plan and can usually choose among mutual funds, bonds and stocks provided by the plan administrator. Like a savings account, a retirement account contains a certain amount of money at all times, although it usually can't be accessed before retirement age without significant penalties. There are some exceptions to this rule in severe cases of economic hardship, such as medical emergencies, foreclosure on your house or college expenses.

Personal Retirement Savings

You can also use your own funds to set up a retirement plan. Opening an IRA is a common way to save for retirement. A traditional IRA lowers your taxable income and grows tax-free until you retire. A Roth IRA is similar, except that it does not lower your taxable income. Unlike a traditional IRA, contributions to a Roth IRA are taxed during the year you earn the income, while distributions are not taxed after retirement as long as they meet certain conditions. Of course, smart long-term investments in regular accounts that hold stocks, bonds and mutual funds can also be a lucrative way to build your retirement "nest egg."

Social Security

Social Security is not voluntary or able to be changed, but it does add some money for retirement. Although Social Security may provide some of your retirement income, you shouldn't depend on it as a complete funding source. Stanford University economist John Shoven observes that significant changes need to be made to the current Social Security system to account for longer life expectancy, later retirement age and slower investment growth rates. Says Shoven, "I think there's going to have to be a set of policies that encourage people to work longer. That's probably the most important adjustment we're going to have to make in the next 20 or 30 years."