Retirement Planning

Although most Americans claim to have retirement savings, recent studies show that many investors have some catching up to do. In the 2006 Retirement Confidence Survey, conducted by the Employee Benefit Research Institute and Mathew Greenwald & Associates, 70% of workers surveyed said they and/or their spouses have saved for retirement. But among survey respondents age 45 and older, 43% report saving less than $25,000 (not including defined benefit plan assets).

Gone are the days when retirees' solely could rely on traditional pension plans and Social Security. While Social Security and defined benefits plans may still play a role in your retirement, the lion's share of your retirement income will come from your own savings and investments—like those you accumulate through employer-sponsored retirement plans, Individual Retirement Plans (IRAs) and other retirement accounts.

Magnifying that responsibility is the fact that life expectancies continue to rise, meaning your savings may have to finance a retirement lasting 20 years or more.

Company Sponsored Retirement Plans

Company-sponsored retirement plans generally come in two varieties:

Defined benefit plans, in which the company is the sole contributor; or Defined contribution plans, in which the employee makes contributions, and the employer may match those contributions.

Defined benefit plan
Defined benefit plans, also known as pension plans, trace their roots to 1875, making them the nation's oldest form of retirement plan. With a defined benefit plan, workers receive retirement income based on their compensation and years of service. In general, employers make the contributions to the pension plan, but some plans allow for employee contributions as well.

Defined benefit plan recipients typically receive their benefits in monthly installments. Alternatively, some plans offer lump-sum distributions upon retirement.

Defined contribution plans
Defined contribution plans, including the popular 401(k) plans, emerged in the 1980s as a vehicle for employees to make pre-tax investments for retirement. When you participate in a 401(k) plan, you designate a portion of each paycheck to your retirement account. The contributions are pre-tax, thereby lowering your taxable income.

Most plans let you invest your contributions in a variety of investment alternatives, including mutual funds and, if available, your company's stock. Your contributions accumulate tax-deferred, meaning your investment dollars can grow and compound free from current taxes. Some plans feature an employer match, whereby your employer provides matching contributions as an extra incentive.

If your employer doesn't offer a retirement plan, or if you want to take advantage of additional ways to save for retirement, consider an Individual Retirement Account (IRA).