The most important financial event anyone will face is retirement. Second to buying a house, retirement takes the most money and planning. Luckily for us, the more time you have until retirement, the less money you have to save for retirement.
I’m not saying you need to start saving for retirement today, although that would be a great idea. However, when you get your first job out of college, it’s important to know the different ways to save for retirement.
The retirement plan you have most likely heard of is a 401(k). A 401(k) is a plan set up by your employer. You can tell them how much of your paycheck you would like them to put into your 401(k), and they will automatically deposit that money every paycheck.
The money in your 401(k) can be invested in stocks, bonds, mutual funds and any combination thereof. You don’t have to worry about investing the money — most 401(k) plans are managed by investment companies who help you with every step of the process. You can also tell them what you want to invest in if you want more control over your money.
The most valuable part of a 401(k) is employer matches. Most employers encourage you to save in their 401(k) by matching your contributions. Commonly, companies will match up to 3 percent of your salary.
This means if you contribute 5 percent of your salary, your company could contribute an additional 3 percent of your salary, out of their pocket. They are giving you free retirement money, and you would be wise to take advantage of it.
The second-most common retirement plan is an IRA, or individual retirement account. An IRA is not much different from a 401(k) — it’s not an investment itself, but an account you save money for retirement with. Think of an IRA as a savings account with special tax rules.
Unlike a 401(k), an IRA is not associated with your employer. You will have to set up your IRA with an investment company like Fidelity or Vanguard. IRAs are for people who are self-employed or whose employers don’t offer a 401(k). There are restrictions on who can set up an IRA based on income or employment.
You may have also heard of a Roth IRA. This is practically the same as an IRA, but the tax rules are a bit different. With an IRA, the money you contribute is taxed when you withdraw that money later. In a Roth IRA, you are taxed when you contribute the money but not when you withdraw it.
You may also have heard about something called a pension. Pensions are quickly becoming outdated. Only 10 percent of private employers offered pension plans in 2011. Still, it’s possible that some of you will be offered jobs at a company, or with the government, that have pension plans.
Pensions are the easiest retirement plan you could have. Your employer will give you money when you retire — simple as that. Based on your salary and how many years your worked with your employer, they will pay you a fixed amount every month until you die. It’s a sweet gig.
This is just a simplified explanation of a few retirement planning options. If you are still interested, go to irs.gov to read about the different types of retirement planning and the different restrictions that go with them. If you do this, you will know how to talk about retirement plans when you interview for your jobs in the future.
Jay Cranford is a 20-year-old finance junior from St. Simons Island, Georgia. You can reach him on Twitter @hjcranford.