Published May 2005
Act
now to supplement
your retirement plan
If
you follow the news — or even if you don’t — you’re probably aware that
the country is debating the future of Social Security. However, this discussion,
while important, may be obscuring another key issue — namely, that many
people are finding their employer-sponsored retirement plans will not
deliver the expected level of benefits.
Clearly, this is
a huge problem for retirees (and a scary prospect for workers). And, if
you are in this second group, you will want to act now to bolster your
retirement savings. Before we look at some moves you can make, let’s review
two factors behind the current concerns in company-funded plans:
- Economic pressures:
For a variety of reasons, pension plans are becoming more expensive
for companies to fund; consequently, some plans go underfunded. As long
as a company remains solvent, its pension plan — even an underfunded
one — will pay out full benefits, but the financial pressure on the
company to fully fund the plan is enormous, and can cause a drag on
earnings. If companies are in danger of insolvency, they may not fund
their pensions at all. When a company terminates its plan, participants
still won’t lose their benefits, but they will lose out on potentially
valuable future accruals, which typically correspond with age and length
of service.
- Switch from
“defined benefit” to “defined contribution”: In 1979, more than
80 percent of workers covered by a company retirement plan had a “defined
benefit” plan — that is, a traditional pension that paid monthly benefits
based on years of service. But by 2001, this percentage had dropped
to just over 40 percent, according to the Center for Retirement Research
at Boston College, as companies began offering “defined contribution”
plans, such as 401(k)s. This shift from “defined benefit” to “defined
contribution” means that employees are now much more responsible for
planning and saving for their own retirements.
What you can do
You cannot control “big picture” events, such as a plan termination or
a switch to another type of retirement plan. You can take steps to boost
your retirement savings inside and outside your plan. Here are a few ideas:
- Prioritize
and quantify retirement goals: Whether you plan to spend your retirement
years traveling, volunteering, pursuing hobbies or even opening a small
business, rank your retirement goals in order of importance and determine
how much they are likely to cost. You may want to get help from a qualified
financial professional.
- “Max out”
on your IRA: Try to fully fund your Roth or traditional IRA every
year. A Roth IRA grows tax free, provided you meet certain conditions;
a traditional IRA’s gains and earnings grow tax deferred.
- Consider delaying
early retirement: If you enjoy your work, consider extending your
career by a couple of years, or take advantage of “phased retirement.”
You’ll be able to contribute more money to your employer-sponsored retirement
plan.
- Increase 401(k)
contributions annually: Try to increase your 401(k) contributions
each year, especially if you get annual raises.
- Don’t “overload”
on company stock: Avoid putting too much company stock into your
employer’s retirement plan; you could incur significant risk if your
company goes through some ups and downs. Most financial experts recommend
limiting company stock to 10 percent of your retirement plan assets.
You can’t always
predict what will happen with your employer-sponsored retirement plan.
But by following your own savings and investment strategies, you can go
a long way toward achieving the retirement lifestyle you’ve envisioned.
Eric Cumley is a Certified
Financial Planner and investment representative with Edward Jones in south
Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member
investment firm with more than 9,000 offices nationwide.
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