Legal Definitions - retirement plan

A retirement plan is a financial arrangement designed to help individuals save and invest money over their working lives to provide income and financial security during their non-working years, typically after they stop employment due to age or disability. These plans can be established by employers for their employees or by individuals for themselves. They often offer tax advantages, such as tax-deferred growth or tax-deductible contributions, to encourage long-term saving for future financial independence.

• Example 1: Employer-Sponsored 401(k)

  Sarah works for a technology company that offers a 401(k) plan. Each month, a portion of her salary is automatically deducted and invested in her 401(k) account, and her employer contributes an additional amount, matching a percentage of her contributions. Sarah intends to use these accumulated funds to support herself financially after she retires from her career.

  This illustrates a retirement plan because it is an employer-sponsored arrangement where both Sarah and her employer contribute funds specifically for her future financial support during retirement. The funds are invested with the explicit goal of providing income once she stops working.

• Example 2: Individual Retirement Account (IRA)

  David is a freelance graphic designer and does not have access to an employer-sponsored retirement plan. To proactively save for his future, he opens an Individual Retirement Account (IRA) with a financial institution. He regularly contributes money from his earnings into this account, choosing various investments like mutual funds, with the explicit goal of accumulating wealth that he can draw upon when he retires.

  This demonstrates a retirement plan as it is a personal financial arrangement David has set up to save and invest specifically for his post-working years. Even without an employer, he is independently building a fund to provide income during his retirement.

• Example 3: Defined Benefit Pension

  Maria worked for a municipal government for 30 years as a public school teacher. Upon her retirement, she began receiving a fixed monthly payment from the government's pension fund, which was established to provide guaranteed income to its long-term employees after they cease working. The amount she receives is based on her years of service and final salary.

  This is a classic example of a retirement plan, specifically a defined benefit pension. The municipal government established this plan to provide a predictable, ongoing income stream to its employees like Maria, ensuring their financial stability throughout their retirement years based on their service.