What is a retirement plan? These days you’ll see the term scattered throughout commercials, employer communications and news stories. What exactly is everyone talking about? The answer is that it often depends on the context.
Definition #1 – IRAs, 401(k)s, Pensions and the Rest
The most common use of “retirement plan” is usually short for “retirement savings plan” and describes the hodgepodge of methods used to squirrel away funds for retirement.
It can mean an employer’s pension plan, profit sharing plan or 401k match, or also an individual’s IRA or other accounts.
Often what makes something a “retirement plan” versus a general savings account is that it has specific tax advantages and incentives. This list on the IRS website outlines many of the most common plans and this page talks through some of the pros and cons of each type.
For even more in-depth descriptions of the various types of plans, check out this guide from the Department of Labor.
Definition #2 – Your Financial Plan for Retirement
Another common use of “retirement plan” is to describe your “financial retirement plan” — in other words your personal financial roadmap for retiring.
Creating a financial retirement plan usually involves taking a look at your current assets and retirement goals (how much you want to spend, what age you want to retire at, where do you want to live, etc.), then figuring out how to accumulate enough money to reach those goals.
Many websites offer tools to help create a financial retirement plan. These can often be great places to start, but keep in mind that a good retirement plan is detailed and takes into account a range of personal circumstances. Most of the online tools are fairly limited, so it can be very useful to talk with a financial planner in person. If you need help finding one, the Certified Financial Planner official website is a good starting point.
Definition #3 – Your Holistic Plan for Retirement
This is the least used definition (in fact, almost no one uses it) but perhaps the most important. A real “retirement plan” shouldn’t just be about your finances. Too often people forget about the other aspects of retirement — such as health, happiness and community — in their planning process.
Obviously, coming up with a holistic life plan for retirement is a lot more abstract, and difficult, than plugging numbers into a retirement calculator. However, there are resources out there to help — in particular a number of books with useful checklists and questionnaires. Here are a two of our favorites, though there are also plenty of others:
How to Retire Happy, Wild and Free, By Ernie J. Zelinski – Amazon Link
What Color Is Your Parachute? for Retirement, By John E. Nelson & Richard N. Bolles – Amazon Link
Photo by Ken Teegardin via Flickr.