Financial terms may be confusing to your clients — especially when it comes to retirement. They may feel intimidated enough to put off asking questions about saving for retirement — or worse — choose to ignore it altogether.
That's where you come in. Building trust with your clients can go a long way; one approach is to help them understand basic retirement terms and definitions. A glossary can serve as an easy resource for your clients and kick off a good discussion on retirement.
What is the value of educating your clients?
While you can discuss any of these terms at length, it can be lot of information for most of your clients to take in, especially if they are just starting to think about retirement expenses and how to save.
Sharing helpful information such as glossaries and retirement review checklists can go a long way in getting your clients to feel more comfortable with their goals and plans. Plus, these small acts can often mean quite a bit to your clients — it shows you have their needs in mind and want to help.
Review the below example of a basic retirement term glossary and consider sharing it with your clients at your next meeting or via email. You may even want to add a few terms and definitions of your own. Since you have a deep understanding of exactly where your clients are and their goals — from early retirement to world travel — you can tailor the glossary to their needs.
Basic retirement terms and definitions
Retirement fund
A retirement fund, generally speaking, is a special account either sponsored by your employer or established on your own to invest contributions for future retirement income. Some examples include individual retirement accounts (IRA)s and employer-sponsored plans such as 401(k)s.
401(k)
A 401(k), also known as a defined contribution plan, is an employer-sponsored retirement savings plan. Employees can make contributions that are tax deductible to this retirement investment account.
Matching contributions
Employers may offer a 401(k) matching program, where the employer will set a pre-determined amount to match employee contributions. For example, the employer might match $.50 for every contributed dollar up to a specified percentage of income.
Individual retirement account (IRA)
An IRA is a "tax-advantaged" retirement investment account. There are different types of IRAs available to accommodate different funding arrangements. You can begin withdrawing funds from an IRA without penalties at age 59 1/2.
Traditional IRA
A traditional IRA allows you to contribute pre-tax dollars to your retirement. You don't pay taxes until the money is withdrawn, and, at that point, it's taxed at your current income tax rate. You must start taking required minimum distributions (RMDs) by age 72.
Roth IRA
Roth IRAs are after-tax retirement accounts. If certain guidelines are met, including age and how long you've had the account, withdrawals can be made on those contributions and earnings tax- and penalty-free. There are no required minimum distributions with Roth IRAs.
Pre-tax retirement accounts
With pre-tax retirement accounts, which are also known as tax-deferred retirement accounts, you do not pay taxes on contributions until funds are withdrawn from the account.
After-tax retirement accounts
For after-tax retirement accounts, contributions withdrawn are not taxed because they are made with money that has already been taxed.
Pension plan
A pension plan is also called a defined benefit plan. This type of retirement plan will have your employer fully funding and investing contributions for you. Your employer will define the income you will get in retirement from the pool of investments based on criteria such as your age, years worked with the company and total earnings.
Retirement annuity
Retirement annuities are a way to generate income during retirement. You pay an insurance company a lump sum or series of payments, and, in return you will receive a lump sum or series of payments from the company for a pre-determined time or for the rest of your life.
Want more ideas for how to educate your clients? Learn how you can help your clients set smart and realistic financial goals to help them plan for their retirement.
SM.1575869.03.20
