Retirement Plans

The Benefits of a Retirement Plan


Did You Know...

  • Retirement can last for 30 years or more?
  • Retirees may need up to 80% of their annual income today to retire comfortably?
  • The average amount paid monthly by the Social Security Administration in the form of a benefit is $1,083?

Why Participate in a Retirement Plan?

Saving through an employer retirement plan is one of the easiest ways for employees to save. Recent tax law changes have increased the contribution amounts that are deductible for 401(k) plans and IRAs, for example. Participants age 50 or older can save additional amounts to help catch up on their savings as they near retirement.

Other employee benefits include: tax on employee contributions is deferred until distributed, investment gains in the plan are not taxed until distributed, retirement assets can be carried from one employer to another, contributions can be made easily through payroll deductions, Saver's Credit is available, and better financial security is available upon retirement.

Future Retirement Savings Value

Monthly Savings, 6% 5 Years 15 Years 20 Years
$50 $3,489 $14,541 $23,102
$200 $13,954 $51,164 $92,408
$500 $34,885 $145,409 $231,020
Source: IRS

Most of us know it is smart to save money for those big-ticket items we really want to buy – a new television or car or home. Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is your retirement.

Perhaps you've never thought of "buying" your retirement. Yet that is exactly what you do when you put money into a retirement nest egg. You are paying today for the cost of your retirement tomorrow. The cost of those future years is getting more expensive for most Americans, for two reasons. First, we live longer after we retire - with many of us spending 15, 25, even 30 years in retirement – and we are more active. Second, you may have to shoulder a greater chunk of the cost of your retirement because fewer companies are providing traditional pension plans and are contributing less to those plans. Many retirement plans today, such as the popular 401(k), are paid for primarily by the employee, not the employer. You may not have a retirement plan available at work or you may be self-employed. This puts the responsibility of choosing retirement investments squarely on your shoulders.

Unfortunately, just about half of all Americans are earning retirement benefits at work, and many are not familiar with the basics of investing. Many people mistakenly believe that Social Security will pay for all or most of their retirement needs. The fact is, since its inception, Social Security has provided a minimum foundation of protection. A comfortable retirement usually requires Social Security, pensions, personal savings and investments.

In short, paying for the retirement you truly desire is ultimately your responsibility. You must take charge. You are the architect of your financial future.

That may seem like an impossible task. Many of us live paycheck to paycheck, barely making ends meet. You may have more pressing financial needs and goals than "buying" something so far in the future. Or perhaps you've waited until close to retirement before starting to save. You still may be able to afford to buy the kind of retirement you want. Whether you are 18 or 58, you can take steps toward a better more secure future.

Financial planning is the key tool for making a secure retirement a reality. It will help you clarify your retirement goals as well as other financial goals you want to "buy" along the way. It will show you how to manage your money so you can afford today's needs yet still fund tomorrow's goals. It will help you make saving for retirement and other goals a habit. There is no such thing as starting to save too early or too late – only not starting at all! Learn how to save your money to make it work for you, an how to protect it so it will be there when you need it for retirement. Take best advantage of retirement plans at work.

Yes, retirement is a big purchase. The biggest one you may ever make, yet you can afford it – with determination and hard work, a sound savings habit, the right knowledge and a well-designed financial plan.

Top 10 Ways to Prepare For Retirement

  1. Know Your Retirement Needs
    Retirement is expensive. Experts estimate that you'll need about 70 percent of your pre-retirement income – lower earners, 90 percent or more – to maintain your standard of living when you stop working. Take charge of your financial future.
  2. Find Out About Your Social Security Benefits
    Social Security pays the average retiree about 40 percent of pre-retirement earnings. Call the Social Security Administration at (800) 772-1213 for a free Social Security statement and find out more about your benefits at www.socialsecurity.gov.
  3. Learn About Your Employer's Pension or Profit Sharing Plan
    If your employer offers a plan, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you request one. Before you change jobs, find out what will happen to your pension. Learn what benefits you may have from previous employment. Find out if you will be entitled to benefits from your spouse's plan. For a free booklet about protecting your pension, see What You Should Know about Your Retirement Plan.
  4. Contribute to a Tax-Sheltered Savings Plan
    If your employer offers a tax-sheltered savings plan, such as a 401(k), sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate.
  5. Ask Your Employer to Start a Plan
    If your employer doesn't offer a retirement plan, suggest that it start one. Simplified plans can be set up by certain employers. Read about IRAs on the IRS Web site.
  6. Put Your Money Into an Individual Retirement Account
    You can put up to $5,000 a year ($6,000 if you are age 50 or older) into an Individual Retirement Account (IRA) and gain tax advantages. The chart below illustrates the way your account can grow in an IRA. When you open an IRA, you have two options – a traditional IRA or the newer Roth IRA. The tax treatment of your contributions and withdrawals will depend on which option you select. Also, you should know that the after-tax value of your withdrawal will depend on inflation and the type of IRA you choose.
  7. Don't Touch Your Savings
    Don't dip into your retirement savings. You'll lose principal and interest, and you may lose tax benefits. If you change jobs, roll over your savings directly into an IRA or your new employer's retirement plan.
  8. Start Now, Set Goals, and Stick to Them
    Start early. The sooner you start saving, the more time your money has to grow. Put time on your side. Make retirement savings a high priority. Devise a plan, stick to it, and set goals for yourself. Remember, it's never too early or too late to start saving. So start now, whatever your age!
  9. Consider Basic Investment Principles
    How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you'll have saved at retirement. Know how your pension or savings plan is invested. Financial security and knowledge go hand in hand.
  10. Ask Questions
    These tips point you in the right direction. But you'll need more information. Talk to your employer, your bank, your union, or a financial advisor. Ask questions and make sure the answers make sense to you. Get practical advice and act now. Financial security doesn't just happen. It takes planning and commitment and, yes, money.