Social Security and even pension income is rarely enough to cover all your expenses in retirement, especially as time goes on and inflation increases the cost of living. You need a retirement nest egg that you control and can use to offset the affects of inflation on your retirement income. This should include investments in retirement accounts that bestow tax advantages, such as an individual retirement account (IR A) or an account provided through your job, most commonly a 401(k).

Never has a dull patch of bureaucrat-speak become so famous that millions of ordinary Americans refer to it by name in water-cooler chats at work, in financial planning discussions with advisors, or at the kitchen table. 401(k) plans grew rapidly in popularity starting in the mid-1980s when companies and employees alike discovered that retirement plans that made contributions directly from employee paychecks could become a core employee benefit.

Companies liked them because they were less expensive than traditional defined-benefit pension plans, which required larger employer contributions and cost employers more. Employees liked 401(k)s, which are a kind of defined-contribution plan, because they were more portable than pensions. In a workforce that is increasingly mobile and less likely to work for a single company for an entire career, one of the most popular features of 401(k)s is that they’re easily moved from one employer to the next or even into an account that the employee manages, something that’s not always possible with a pension plan.

Many employers give their retirement plan a descriptive name like employee savings plan or savings plan, but most simply call their plans 401(k)s. If you work for a large for-profit company, your plan likely goes by that name. If your employer is a nonprofit, a school, or a hospital, your plan is probably called a 403(b). Other special plans are named after their own parts of the tax code called 457 plans and 401(a) plans. If you work for a small company or if you’re self-employed, you might have a SIMPLE plan or a SEP IRA plan. We cover how to harness the financial power of all these plans in the next few chapters.

While the federal government gave life to these plans, we emphasize that managing these plans—selecting investments from a list of choices and deciding how much to invest in the plan—is entirely up to you. These are your accounts, and aside from a few exceptions, even your retirement plan at work is separate from your employer’s assets. This means that if your employer goes out of business, your retirement plan account is not in jeopardy—it’s not an asset your employer’s creditors can look at to pay off company debts. This provides protection and peace of mind in a tough economy, but at the same time, the government is sending a strong signal through the legislation it’s enacting: a comfortable retirement is, more than ever, your responsibility.

Similar to the rules of the road you had to study when getting your drivers license, the Employee Retirement Income Security Act (ERISA) sets the minimum standards that the employer has to follow in managing your retirement benefit plans. The employer must have a plan document that describes:

The separate trust fund requirement is what keeps your retirement money safe from the fortunes of the company.

Whether or not your employer offers a retirement plan, if you or your spouse has earnings from work, you can invest in personal retirement accounts that you open yourself: an IRA or a Roth IRA. Like the plans at work, these personal accounts have rules that limit the amount you can contribute each year. These accounts are separate from your job, so you can’t invest in them directly through your paycheck, but depending on your income and whether you have a retirement plan at work, you might be able to deduct the amount you deposit in an IRA on your tax return. This deduction saves you income taxes just as if you had contributed to your employer’s plan through your paycheck.

One advantage these personal retirement accounts have is that you can pick almost any investment you’d like for your account. You’re not limited by the list your employer has chosen for your company’s 401(k) plan. The choices available in an IRA may seem overwhelming at first, but once you’ve learned how to pick your investments, this extra control you have makes your personal retirement accounts a powerful way to grow your retirement nest egg.

While there’s probably a small risk that your mutual fund provider or certificate of deposit (CD) issuer will go insolvent, it’s prudent to understand how your investment accounts are insured. The IRA accounts you open yourself will contain investments that should have either Federal Deposit Insurance Corp. (FDIC) or Securities Investor Protection Corp. (SIPC) insurance coverage. FDIC insurance protects your cash deposits up to $100,000 from loss in the unlikely event your bank fails. Look for FDIC insurance on your CDs and your money market deposit account at your bank or credit union. FDIC insurance is limited to $100,000 per person at each individual bank. That means that if you have a savings, a checking, and a CD at one bank and all the accounts are in your name alone, you have full coverage if the total of all the accounts is less than $100,000.

Not all money market accounts carry FDIC insurance. Accounts without this coverage may only be as safe as the company that issues them. Read the information provided about the money market—the prospectus—carefully before you invest to be sure your money is safe. SIPC insurance is funded by premiums paid by broker-dealers, like Fidelity Investments, Charles Schwab, and Vanguard Investments. SIPC insurance covers losses of assets from brokerage accounts, the deposits that brokers use to finance stock, bond, and other securities transactions.

The Least You Need to Know