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With the Social Security system in obvious turmoil, it is becoming apparent that many of us will need to have alternate financial plans in place to ensure a comfortable retirement. Even if - by chance - Social Security is still available to us when we retire, the monthly benefit will not be enough for many of us to live on. This page covers some of the beneficial retirement savings options available to us.
401k
If you work for a company that offers 401k benefits, you already have access to one of the
best retirement savings plans available. The key to the 401k is that you are saving tax-deferred, meaning you
won't be taxed on the money until you being taking distributions (after age 59 1/2). One of the best features of
the 401k plan is that it is virtually a painless way of saving. Contributions are automatically deducted from your
payroll pre-tax (unless after-tax is instructed). Therefore, you never really see the money and therefore don't miss it.
You can contribute as much as you'd like up to the annual limit - which is dependent upon where you work and the current
year's adjusted maximum.
Many companies that offer the 401k plan also encourage participation by matching contributions up to a certain percentage - typically between 4% and 6%. In other words, you can get an instant pay raise by simply saving for your future. Some companies even provide additional contributions as a means of profit sharing. Most 401k plans also offer a variety of investment funds to choose from, allowing you to control how aggressive or conservative you'd like to invest.
As with any investment there are precautions that should be taken. As many former Enron employees would tell you, don't put all of your eggs in one basket. Diversify your contributions enough to safeguard against potential disasters.
When properly managed, there really is no downside to a 401k plan. As a matter of fact, the earlier you get started the better. Consider the following example. Two employees - one age 25 and one at age 30 - begin contributing $2000 per year to their 401k plan. Each earn 8% per year. When the older of the two retires at age 65 he has $244,000. When the younger retires, he has $372,000. That's $128,000 more than the older employee - all for starting only five years earlier and contributing only $10,000 more ($2000 x 5 years).
IRAs
Individual Retirement Accounts are another good option for retirement savings. All dividends and earnings are tax-deferred
until the time they are distributed. Like the 401k plan, you may begin to receive distributions from an IRA after
age 59 1/2.
When changing employers, 401k funds may be transferred into an IRA to protect their tax-deferral status. For many years, regular annual IRA contributions (other than 401k transfers) were limited to $2,000. Recent changes have significantly improved our ability to save for the future, incrementally increasing the limit over the next few years. In certain circumstances, some or all of the contributions may also be tax-deductible for the contribution year.
Different types of IRAs are available to fit individual needs:
| © 2005 - Mark Larkin |