In the past when you worked for one or two companies most of your life, your employer provided a pension plan.  This plan is called a defined benefit plan. When you retired, your employer would pay you a monthly pension payment, a benefit you had earned by long service.

Today people work for multiple companies over their career.  So, it was advantageous to create pension plans that were more portable and could be rolled over to your new employer.  This type of pension plan is called a defined contribution plan.

The bad news is that you are YOYO – you’re on your own.  You must take the initiative to contribute to an employer sponsored plan.

Employer sponsored plans, 401k, 403b and 457 are named for the section of the Federal tax code.  401k is the plan for the corporate world.  403b is the plan for non- profits, primarily hospitals and educators.   457 is the plan for local and state government workers.

You cannot withdraw money from these accounts unless your situation is judged a severe hardship, but you can borrow your funds.

In reality, it is not always easy to roll over your funds to your new employer’s sponsored plan and many people end up with plans at several companies.  Do you have multiple 401k/403b/457 plans from different employers?  You may want to roll those previous plans into a traditional IRA to better track these investments.

There are two general types of IRAs, a traditional IRA and a Roth IRA.  You contribute pre-tax dollars into a traditional IRA, which means when you retire withdrawals will be taxed.  You contribute after-tax dollars into a Roth IRA, so when you retire withdrawals will not be taxed.   Both IRAs allow you to withdraw money for any reason, but there is a stiff penalty for withdrawals from a traditional IRA.  More information available at this website and others: RothIRA.com

There are also plans for small business and sole proprietorships called SEPs.

Remember MoneyYOYO – you alone have to make this happen.

Kowalczyk reminder:  You need to abide by contribution rules and other rules.  Consult  IRS Retirement Plans

Kowalczyk suggestion:  Parents and grandparents can contribute to your IRA.

Kowalczyk suggestion: A nonworking spouse can open a Roth IRA

 

You have barely started working, so why would you start worrying about retirement? The expected retirement age for Millennials is 73 years old. You have lots of time or do you?

A recent Fidelity study stated that if a 25 year old begins saving $160 per month for retirement it would generate $1,000 in monthly retirement income.

If you wait until you are 35 years old, you will need to save $270 per month to generate the same income. And if you wait until you are 45, you will have to save $500 per month. It pays to start early in retirement savings.

You pay FICA taxes to fund Social Security every paycheck, so that will be your retirement income. Today, Social Security does provide the bulk of retirement income for retirees and the average benefit is around $15,000 a year. Is that enough income for your retirement? What will Social Security look like when you turn 73? Who knows at this point?

Today 73% of baby boomers expect to work beyond retirement according to a 2013 Gallup Poll. 41% want to take on a second career or prefer to work. The other 32% are working beyond retirement by necessity. They did not save enough money.

A Rule of Thumb is that you should save 10 to 15% of your income for savings each year.

How much are you contributing to your Employer Sponsored Savings Plan? Does your employer match some percentage of your contributions? Do you contribute enough to capture the entire employee match? This is free money, so take it.

Does your employer have a defined benefit retirement plan? This is an old style pension plan where your employer makes the contributions.

If your employer does not have a retirement plan or if you are self-employed, are you making retirement contributions to a traditional IRA or a Roth IRA?

So, how are you doing on retirement savings? My next few postings will get into more detail on retirement savings plans.

Kowalczyk recommendation: Download “If You Can: How Millennials Can get Rich Slowly” by William J Bernstein on Amazon for 99 cents.

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