Three Common Retirement Terms (and an IRA Custodian)

December 4, 2020

When you were a child, your sweet Grandma might have said, “Always make sure you save for a rainy day, sweetie.” In your youthful innocence, you likely understood that “saving” was equivalent to putting a few pennies into your piggy bank, and that was acceptable at the time. However, as time marched along and you matured into a young adult, you probably began to hear more sophisticated savings-oriented phrases such as “portfolio,” “investments,” and “retirement.” Depending on your upbringing, these seemingly simple financial terms may have been clearly defined by the mature adults in your life. Still, more than likely, the words left you nodding your head in feigned understanding while your brain puzzled over their implications. “I’m too young to think about those things – I figure all of that out later,” you may have reasoned.

For many of us, the less formal and quite common term, “nest egg,” is more within our reach of understanding. But precisely what is a “nest egg,” and do you need an IRA Custodian to have one? Well, maybe, but maybe not. As confusing as that might seem at first, it is not a complicated subject, but we will cover that in a few minutes. First, let’s unpack some of the most popular terms in retirement investment language: “nest egg,” “401(k)”, and “IRA.”

The Illustrious “Nest Egg” and Why You Need to Hatch One

Merriam-Webster defines the noun nest egg as “a fund of money accumulated as a reserve.” Much like many other colloquialisms, this metaphorical savings term comes from a very literal practice. As early as the 17th century, it is said that by placing additional eggs in their hens’ nests (apparently both real and artificial), poultry farmers could prompt the laying of more eggs. Because more eggs meant more income for poultry farmers, the term “nest egg” has become synonymous with the act of investing some now with the promise of increased yield later. A well-placed financial nest egg into the “nest” of your future lays the groundwork (pun intended) for enough eggs (money) to keep you eating and experiencing this earth in a fashion that suits your lifestyle.

You might ask, “How much money (or ‘how many eggs’) will I need for retirement?” The answer to that question is entirely dependent upon you and your future lifestyle goals. Your desired lifestyle at retirement has everything to do with how you plan and place your “nest egg” to fill up your future’s nest. Since goals can vary from person to person, many investment professionals agree with what has been called “the four percent rule.” According to Investopedia, “The Four Percent Rule states that you can withdraw 4% of your portfolio each year in retirement for a comfortable life.”

So, if you foresee living on $40,000 per year during retirement, it would be wise to plan a portfolio valued at $1 million. Are you more accustomed to an $80,000 per year lifestyle? Then you should probably aim for an investment portfolio valued at $2 million. If those numbers seem daunting, working with a respected IRA custodian might help you gain confidence in reaching (or exceeding) your retirement goals. Regardless of “how many eggs” are right for you in the future, don’t waste any more time: hatch your nest egg as soon as possible!

The 401(k) Plan: Familiar, Yet Sometimes Misunderstood

As a newly minted employee in your twenties, you may have been told you had a 401(k) included in your employee benefits package, but you were not clear on what that meant at the time. Fast forward twenty years later, and frankly, although you hate admitting it, you are still a bit fuzzy on its meaning. Don’t worry — you are not alone.

In its most basic definition, a 401(k) is an employer-sponsored defined contribution retirement savings plan. What does that mean to you in real-life terms? In a nutshell, as long as you remain employed by the company offering the 401(k) plan, you can make contributions from your paycheck either before or after-tax, depending on the options offered in the plan. Many employers offer a “matching” plan for an additional investment of up to 50% of up to the first 6% you contribute to your 401(k). If you contribute 6% ($3,000) of your $50,000 salary with such employers, your employer will contribute an additional $1,500 (50% of your 6%). That’s “found” money! If you are employed by a company offering a 401(k) with or without a match, make an appointment with your HR department post-haste to get the egg rolling toward whatever plan is available to you.

In January 2019, the American Benefits Council reported that over half-a-million American companies offer a 401(k)-type plan to employees, with nearly 80 million active employees participating in those plans. Based on those numbers compared to other retirement savings plans, the 401(k) is arguably the most popular retirement savings vehicle in the United States. That said, employers are not required to offer 401(k) plans (or any employer-sponsored savings plan) to employees, so don’t be alarmed or disappointed if your company does not offer one. Additionally, it is important to know that 401(k) contributions cannot occur outside of payroll. So, once you leave a 401(k) plan-offering company for any reason, you will no longer be able to invest in that 401(k) plan; you will need to contribute to your retirement savings by other means, such as an IRA, which may or may not require a trusted IRA custodian. At the very least, if you left a company and its 401(k) behind at any point in your past for any reason, you should consult a trusted financial advisor about rolling those funds into an IRA.

The Individual Retirement Arrangement (IRA)

What is an investment-minded person to do if their employer does not offer any employer-sponsored defined contribution retirement savings plan, or if they are self-employed? Enter the retirement savings vehicle available to nearly all adults: The Individual Retirement Arrangement (IRA). In its simplest definition, an IRA is a tax-advantaged personal savings arrangement that allows individuals to contribute funds toward retirement savings. There are several different IRAs, including traditional IRAs and Roth IRAs, which are available to individual taxpayers apart from any employer involvement. An IRA may be established with a bank, insurance company, or other financial institution. IRAs share benefits and key factors such as tax-sheltering, contribution limits, timelines for distributions, and beneficiary designations at their base level. All IRAs require an entity approved by the Internal Revenue Service (IRS) to act as custodian.

Investments held in conventional IRAs can encompass a range of financial products such as stocks, bonds, and mutual funds held by a bank or brokerage company. In the case of self-directed IRAs, a trusted IRA custodian allows you to invest outside the more conventional world of stocks, bonds, and mutual funds and venture into “non-traditional” IRA investments such as exchange-traded funds (ETFs), real estate, or even precious metals. For example, qualified, experienced investors might include real estate investments within their self-directed IRA to enjoy tax-deferred gains for real estate bought and sold within their self-directed IRA.

Regardless of what investment type suits you best, the bottom line is that you need to think about hatching your nest egg as early in your life as possible. The Retirement Industry Trust Association (RITA) is a professional trade association dedicated to expanding all Americans’ opportunities to save and invest for retirement.

Comprised of regulated banks, trust companies, and industry-related professionals, RITA exists to be the leading educator and advocate for the self-directed retirement plan industry’s growth and best practices by providing resources, information, communication, and support to both its members and investors. When considering a self-directed IRA, investors must work with a trusted IRA custodian. RITA membership stands at the ready to assist investors with their nest egg-related IRA questions.