Retirement may seem a long way into the future, but you can use that runway of time to your advantage. Investing is most effective when you have a long time. The longer you have, the less you need to set aside each month.
The Employee Retirement Income Security Act (ERISA) covers two main types of employer-sponsored retirement plans:
Defined benefit plan, which promises a certain monthly benefit at retirement paid to you for the rest of your life, such as a pension.
Defined contribution plan, which invests contributions into a fund the employee can draw from at retirement, such as a 401(k) or 403(b) plan.
In both types of plans, both the employer and employee can contribute – often the employer will match employee contributions up to a certain amount or percentage of their salary. Also in both cases, the money is invested into a portfolio of assets – stocks, bond, mutual funds, ETFs, and sometimes other asset classes.
The main differences are
Employees can usually choose from a limited range of investment options for a 401(k) or 403(b) plan, but have no input on how a pension fund is invested.
Employees know what the benefit for the pension will be, but the benefit for the 401(k) or 403(b) depends on how the market performs.
Take the free money!
If you are lucky enough to work for a company or organization that has a retirement plan with an employee match, take them up on it! At least contribute enough to get the employer match – that's free money set aside to work for you until your retirement.
If you leave your current employer, you can always roll over your contributions and whatever employer contributions you are vested in tax-free to another employer’s retirement plan or an individual retirement account.
The limits on how much you can contribute to a 401(k) or 403(b) plan are quite high: $23,500 in 2025, with a catch-up of an additional $7,500 for people ages 50 and up. The total contribution limit for both employee and employer contributions is $70,000.
