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Retirement Planning

Retirement glossary: Terms you should know

Learn some of the retirement terms and definitions you need to know in order to make decisions for your financial future.

When it comes to thinking about retirement, sorting through financial jargon can make things confusing. Don't let this lack of certainty cause you to put off saving for retirement until later — or worse — not at all.

Here's a basic retirement glossary that can help you get started:

Retirement fund

A retirement fund, generally speaking, is a special account either sponsored by your employer or established on your own to invest contributions for future retirement income.

401(k)

A 401(k) is an employer-sponsored retirement savings plan. It's also known as a defined contribution plan. This plan allows employees to make regular contributions that are tax-deductible to an investment account for use in retirement. Contributions have a maximum annual contribution limit set by the Internal Revenue Service (IRS).

Matching contributions

Many employers also offer a 401(k) matching program, where the employer will set a pre-determined amount to match employee contributions. For example, the employer might match $.50 for every contributed dollar up to a specified percentage of your income.

Individual retirement account (IRA)

An IRA is an investment account for retirement saving. These accounts have a set annual contribution limit defined by the IRS.

IRAs are "tax-advantaged," meaning they have tax benefits, which depend on the type of IRA you choose. Once you hit the age of 59 1/2, you can begin withdrawing from your IRA. If you withdraw before that age, you will face additional tax penalties.

Traditional IRA

One type of IRA is a Traditional IRA. It is a tax-deferred retirement option, meaning you make contributions with your pre-tax dollars and don't pay taxes until the money is disbursed. You are taxed at your current income tax rate at the time of withdrawal.

Traditional IRAs have set annual contribution limits, and you must begin to take your required minimum distributions (RMDs) by age 72.

Roth IRA

Another type of IRA is a Roth IRA. With a Roth IRA, you contribute after-tax dollars. However, you can withdraw your contributions — the money you put into the account — anytime without taxes or penalties. Earnings on contributions can also be withdrawn without taxes or penalties, however, only if the conditions set forth by the IRS are met.

As with other types of investment accounts, the IRS determines the maximum yearly contributions you can make. Moreover, Roth IRAs don't have any RMD requirements.

Learn more about distributions from individual retirement accounts from the IRS.

Pre-tax retirement accounts

A pre-tax retirement account is an account for which you do not pay taxes on your contributions or earnings until you begin withdrawing from them. For many, the benefit of this type of account is that contributions made up to the IRS-declared annual contribution limit are exempt from federal income tax for that year.

After-tax retirement accounts

With an after-tax retirement account, the contributions you withdraw are not taxed. This is because you have already paid taxes on your contributions, as they have been made with after-tax dollars.

Pension plan

A pension plan is another type of retirement plan. It's also called a defined benefit plan. With this type of retirement plan, your employer funds and invests contributions for you. They also define the income that you will get from the pool of investments based on a set calculation that can include total earnings, age and years worked at the company.

Retirement annuity

With a retirement annuity, you pay a lump sum or a series of payments to an insurance company, and, in return, the company will pay you a lump sum or series of payments for a pre-determined number of years or for the rest of your life.

Many use retirement annuities to provide a stable source of income during retirement.

Annuities are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply.

So, what is the average retirement income?

The average retirement income depends on a lot of factors, such as the amount of Social Security you will receive.

Are you concerned about whether you will have enough saved to support you throughout your retirement? Here are a few facts about retirement savings to consider while you evaluate your retirement prospects.

What is the average retirement income in the U.S.?

According to 2020 data from the U.S. Census Bureau, the the median average retirement income for retirees 65 and older is $47,357. The average mean retirement income is $73,228. 

Where does retirement income come from?

Social Security is a major source of income for many retired Americans.

In 2021, 46.7 million retired workers were projected to receive a collective $72.7 billion in Social Security benefits, according to data from the Social Security Administration. The average monthly Social Security benefit for each retired worker comes to around $1,555.

In addition to Social Security, earnings from private and government pensions provide income for many American households.

There are other options that can help boost your income stream, including delaying the start of Social Securityincreasing your 401(k) contributions and opening an IRA. Some individuals may be able to supplement their retirement income with an inheritance, but this is not something people should count on. A financial professional can help you determine if any of these strategies are appropriate for you by asking detailed questions about your financial situation, lifestyle and expectations for the future.

How much retirement income do you actually need?

There are several factors that can impact your retirement income needs. The first is your day-to-day living costs.

There are a handful of questions you can ask yourself to help you get a good idea of how much your retirement expenses will be and what you'll need to live comfortably:

  • What is your current monthly take-home pay?

  • What expenses, such as health insurance, will you have to pay out-of-pocket once you are retired?

  • What are your extra costs (such as vacation travel)?

  • Do you have expenses that will decrease in retirement (such as commuting or the cost of work clothes). Keep in mind that your payroll taxes will be eliminated totally if you are no longer working, so that's another expense you won't have to cover.

By realistically approximating your retirement expenses and income, you'll start to get a rough estimate. It's also a smart idea to figure out how much tax you can expect to owe on your retirement income.

Next, you'll estimate how much you're likely to receive from Social Security and from any pension you may have, then add in any other savings. The Social Security Administration's Quick Calculator can provide an estimate in both current and inflation-adjusted dollars. By calculating how much you'll receive in Social Security, you can get a better sense of what your average retirement income will be and if you'll need to consider adding more income from another source.

Ready to learn more about your options for saving for retirement? Get an overview of the different types of retirement funds.

 

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