There was a time, not so long ago, when many Americans took retirement for granted.
They worked at the same company for their entire careers, and in exchange, they were promised a generous retirement package that included a comfortable income and health insurance for the rest of their lives.
In addition, most Americans could also count on steady income from Social Security every month, as well as comprehensive health benefits through Medicare. So much for a stroll down memory lane.
Twenty-first-century Americans face a very different retirement landscape.
The most dramatic change has been a shift among most employers away from the traditional defined benefit pension plans, which were funded by employers and promised employees a specified amount of money in retirement that they could count on, to defined contribution plans.
Other than the fact that defined contribution plans depend mostly on employee, rather than employer, contributions, the other main difference is that they are also dependent on investment performance. These two factors combined have shifted the responsibility for retirement planning squarely from the shoulders of employers to those of employees.
Fortunately, the federal government has taken steps to make it not only easy to save and invest for retirement, but also to provide generous tax breaks for doing so. This started with the introduction of IRAs in 1975 as the first government-sponsored, tax-advantaged tool to help Americans save for retirement. Starting in 2002, the annual IRA contribution limit has been indexed for inflation, and has now risen from the original $2,000 to $5,500 (or $6,500 if you're age 50 or over).
Since then, a number of new retirement savings tools have also been introduced, like 401(k)s, SEPs, SIMPLE plans, and Roth IRAs.* Each has different features, benefits and requirements. A well-diversified retirement plan may include more than one of these retirement savings vehicles.
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* Source: Employee Benefits Research Institute
