Financial security and independence are central to retirement planning, and in order to achieve these goals, some important factors need to be taken into consideration and they are summarized below.
| The work life expectancy (WLE) | Generally 30-40 years; shorter if already in workforce |
| The retirement life expectancy (RLE) | The time period between retirement and death |
| Savings concepts, incl. investments and inflation | Savings rate, timing, investment decisions, and inflation |
| The retirement goal definition (Retirement needs) | Analysis on pre-tax and post-tax basis |
| The work replacement ratio (WRR) | Estimate of retirement income need |
| Sources of retirement income | Social security, private pension/retirement, personal savings, and full-time/part-time work |
| Qualitative factors* | Involuntary vs voluntary retirement, emotional and psychological factors, relocation, etc. |
*Though qualitative factors appear last on the list, they are as important as or in some cases more important than quantitative factors.
Types of retirement Plans
Broadly speaking, there are three types of retirement plans – qualified plans, nonqualified plans, and tax-advantaged plans. Some, but not all-inclusive, common plans available in the workplace today are described below.
| Qualified Plans | Nonqualified Plans | Tax-Advantaged Plans | |
| Defined Benefit (DB) Pension Plans | Defined Contribution (DC) Plans | ||
| Traditional DB pension plan | Section 401(k) plan | Section 457 plan | Section 403(b) plan, incl. Roth |
| Roth 401(k) plan | Traditional IRAs | ||
| Roth IRA | |||
What is a qualified (retirement) plan?
It is an employer-sponsored retirement plan satisfying the Internal Revenue Code (IRC) section 401(a) requirements for receiving tax-deferred treatment (i.e., tax benefits).
What is a nonqualified (retirement) plan?
It is any retirement plan not satisfying the Internal Revenue Code (IRC) section 401(a) requirements for receiving tax-deferred treatment (i.e., tax benefits).
Qualified Plans
Traditional DB pension plan
- A pension plan that provides a specific benefit at retirement
- The objective is to maximize plan contributions for the benefits of older employees/owners
- The employer bears investment risks.
Section 401(k) plan
- A retirement plan with before-tax elective deferral contributions
- An individual account with accumulated benefit at retirement or termination
- The employee bears investment risks.
Roth 401(k) plan
- A section 401(k) plan with after-tax elective deferral contributions
- The main difference between Section 401(k) plan and Roth 401(k) plan is the tax treatment of contributions and distributions.
Nonqualified Plans
Section 457 plan
- A deferred compensation plan of governmental units, governmental agencies, and non-church-controlled, tax-exempt organizations
Tax-Advantaged Plans
Section 403(b) plan
- A tax deferral employee plan for certain tax-exempt organizations and certain public schools and colleges (i.e., the not-for-profit industry)
- Though not a qualified plan, it offers many of the same benefits and complies with many of the same rules applicable to Section 401(k) plans.
- Some plans may offer Roth 403(b) plan option.
Traditional IRAs
- A tax-advantaged personal savings plan where contributions may be tax deductible
Roth IRA
- A tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free