What is a Retirement Plan?

A retirement plan is a financial arrangement designed to help people save and invest for their future after they retire from work. It is a structured system that allows individuals to set aside money on a regular basis during their working years so they can have a source of income during their retirement years. Retirement plans come in various forms, including employer-sponsored plans like 401(k)s and pensions, as well as individual retirement accounts (IRAs) that an individual can set up on their own.

Types of Retirement Plans

There are two main types of retirement plans: defined contribution plans and defined benefit plans. Defined contribution plans, like 401(k)s, allow individuals to contribute a portion of their salary to a retirement account, often with employer matching contributions. The eventual retirement income is based on the contributions made and the returns earned on those contributions.

Defined benefit plans, such as pensions, guarantee a specific amount of income during retirement based on factors like salary and years of service. Employees do not contribute to defined benefit plans; instead, employers fund these plans on behalf of their employees.

Importance of a Retirement Plan

Having a retirement plan is essential to ensure financial security during retirement. It allows individuals to build a nest egg to cover living expenses, healthcare costs, and other needs when they are no longer working. Without a retirement plan, individuals may struggle to maintain their standard of living in retirement and face financial uncertainty.