Where Your Retirement Fund and the Stock Market Come Together

Retirement. It’s something we all look forward to. An oasis in the distance beckoning us to enjoy a well-deserved rest after a lifetime of work. But before you get there, you need to make sure you’ve put enough money aside to support yourself in this relaxing stage of life.

In order to save for retirement, most people will contribute to a retirement fund on a regular basis. This often happens without much thought, as employers can make automatic deductions from your pay checks that go directly to that fund. But where does that money go exactly? And how does it grow?

It all comes down to investments and the stock market. Retirement funds are often structured so that your contributions are invested into the stock market through low-risk avenues. This means that your money is put into public companies and indices that are expected to grow in the long term.

On the one hand, this is how your nest egg can grow consistently over time; but on the other, it also means your retirement savings can be at risk in the case of a potential recession. Because of this, it’s important that you understand how your retirement fund works, and what you can do to protect your savings in the long run.

How Retirement Funds Work

Depending on your type of employment and the plan your employer selects, there are different types of retirement plans. For instance, if you work for a big company, you might be on a 401(k). This is a company account where you can select investment options based on the plans your employer makes available. A 401(k) account will allow you to directly deposit into the fund from your paycheck before tax, but you can opt for it to be automatically withdrawn before you’re paid. If you work for a smaller business of up to 100 people, you might have a SIMPLE IRA account instead—however, this has stricter limitations when it comes to making withdrawals on your account.

Another positive about the 401(k) is that many employers will match your contribution up to a certain amount—doubling the amount of money you put into your retirement. This money will then get invested and grow slowly through safe and low-risk investments. In this plan, you choose from a few options selected by your employer to invest in.

Depending on the employer, you may be able to choose how much involvement you have with your retirement fund and what it’s invested in. For example, the government of Pennsylvania has developed four different plans. Each plan allows you to choose how much of your fund is managed by professional brokers, and how much you can invest yourself.

Meanwhile, if you’re self-employed and have no employees, you might opt for a SEP Individual Retirement Account (IRA), which would help you deduct from your taxable income while contributing to your retirement account. In a SEP IRA, you can choose where to invest your retirement, which gives you more flexibility and agency over your own savings.