Working Americans have access to various retirement accounts and, in recent decades, the 401(k) (403(b) for municipal or nonprofit companies) has become a common offering as an employer plan. Still, I know that the terms of these plans can be daunting and it is easy to decide to skip it. Please do not skip it! No knowledge roll needed, I will give you some basic info to help you get started.
What does your employer offer?
The first thing you will need to know is what your employer offers for a plan. Here are some typical terms you might find when seeking this information:
Annuity: If your plan is an annuity that means that you pay into it while you are working and later, in retirement, it will pay you in installments.
Pension: If your employer offers a pension you should take it. You may need to stay at the company for a few years before it becomes “vested” (meaning you would get to keep it even if you left the company) but this type of plan is one where the company literally just saves money for your retirement. It’s awesome and not very common anymore.
Self-Directed 401(k)/403(b): This just means that you would get to choose your own investments. If you are comfortable and/or want to do the research, then this could be a good plan. Just be aware of the amount of risk you are willing to take with your retirement money since you will need it someday.
Target Date Funds: This is an investment option often offered with retirement plans. Basically you buy a piece of this mutual fund and the mutual fund buys a whole bunch of stocks and bonds based on when you expect to retire. Typically the retirement target year is right in the name. So the 2025 Target Fund will be mostly conservative and not be as risky as the 2055 Target fund since there are so few years left until retirement. These funds are great if you want a “set it and forget it” approach, since the funds will automatically adjust the level of risk as you get closer to retirement.
Employer match: Okay, this is important. If your employer offers a match, that means that when you save to your plan, the company will also save that amount for you. It’s extra money! Oftentimes the match is between 1%-6% and you usually need to stay at a company for a few years before you get to keep the matches if you decide to leave. If your employer offers a match, please start contributing at least that % to your 401(k)/403(b)!
How to get enrolled
Each employer does things a little differently but most companies have an Open Enrollment Period which is a great opportunity to get started with your retirement plan. If you are outside of that and are not currently enrolled, you may still be able to enroll, just ask your manager. Once you are enrolled, you can typically change the amount that you contribute, up to a maximum of $19,500 for the year 2021 ($26,000 if you are 50+), at any time. Feel free to adjust your contributions up or down as you need the cash flow or don’t need it, but I highly encourage you to open a retirement account either way.
What about plans for the self-employed?
You can have a 401(k) too! It is a little more work but can certainly be worthwhile. You can actually contribute both as an employee and as the company in many cases. For this I would recommend talking to your local bank or financial institution to see if they can help you open this type of account and advise you on it. The companies get trickier and this post would be unbearably long if I got into all the nitty gritty of it.
Now you are armed with some basics of the popular employer retirement plans 401(k) and 403(b). How you will use this knowledge is up to you; go forth and enroll!