The Art of Business: Plan for a Creative Retirement
If this dismal past year has proven one thing, it’s the timeless wisdom of the age-old advice: save up for a rainy day. Which brings us to retirement planning. A few bright moves today can earn you thousands, perhaps tens of thousands of dollars, come withdrawal time. If retirement seems too far away for you, consider retirement benefits, then, simply for the tax savings you can reap today, whether you work for a company or work for yourself.
The start of the year is always a good time to review your retirement plan, if you haven’t already done so during the year. And it’s clear that not enough of us are; Almost one-third of American workers may be shortchanging themselves of a comfortable retirement, according to a new survey conducted by American Express. The national telephone survey of working adult men and women found that 30 percent did not invest for retirement in their company’s 401(k) plan.
The survey revealed that young workers, by a wide margin, were the least likely to be saving for retirement. Almost half of those who didn’t invest in their 401(k) plan were between the ages of 18 and 24, and 30 percent were between the ages of 25 and 34.
Income was another contributing factor. More than half of those surveyed who were not saving for retirement earned less than $25,000; another one-third reported an annual income between $25,000 and $50,000.
Weighing the Options
Another key finding in the American Express survey revealed that one out of every four workers who invested in their 401(k) left their retirement assets in their former employer’s plan after they left their job, despite a number of other options that may have been more financially beneficial.
“Individuals who choose to leave assets behind in their former employer’s retirement plan are giving up control of those assets,” said Craig Brimhall, vice president of wealth strategies at American Express.
“Workers who have been laid off or moved on to a new job should consider the possibility of rolling their retirement assets into a self-directed individual retirement account, commonly known as an IRA. IRAs give you more investment choices, and they put you in the driver’s seat because you, not the company, own your retirement plan.”
Eleven percent of those surveyed said they cashed out of their retirement plan because they needed the money to pay off debt or for everyday living expenses — a decision half said they regretted.
“Cashing out of one’s 401(k) of SEP-IRA [for the self-employed] plan is the least advised thing people can do if they want to have enough money saved for retirement,” says Brimhall. “This is money that grows tax deferred until it’s withdrawn, which over time allows you to save more money for your own retirement.”
By law, individuals who take a lump-sum distribution from their 401(k) or SEP-IRA before age 55 are assessed a 10 percent early withdrawal penalty, as well as federal and state income taxes.
Steps to Take Now
Here are few retirement planning tips:
- Participate ASAP.
- If you’re self employed find out about self-employed retirement plans from the likes of Janus, Fidelity, American Express, or better yet hire a fee-base financial planner who doesn’t have vested interest in selling you retirement plans. If you’re employed, join your employer’s plan and take advantage of the tax benefits. If you’re self employed set up a SEP-IRA pronto. Not only can contributions lower your income taxes, the money also grows tax free until you withdraw it at retirement.
- Don’t underestimate the importance of starting to save.
Even if you can only save $50 or $100 a month, it’s still worthwhile. Your 401(k) of SEP-IRA contributions can be automatically deducted from your paycheck, and you can arrange for automatic withdrawals for your SEP-IRA.
- Don’t leave money on the table.
Many employers provide some sort of employee match or contribution with their 401(k) plan. When an employee does not take advantage of the company match — especially when it is immediately vested — participants are leaving money on the table. Don’t walk away from free money.
- Don’t underestimate the time value of money.
Money invested over time may add up to a much larger sum. The American Express survey found that younger workers (ages 18 to 34), who had the most to gain, were far less likely than older workers to invest in their 401(k) or SEP-IRA. This is a big mistake because workers will not reap the benefits of compounding.
- Don’t cash out your retirement savings.
No matter how small the balance, it is important to keep your retirement savings tax deferred. Employees who cash out are assessed a 10 percent early withdrawal penalty, plus state and federal income taxes. They also will not reap the potential benefits of compounded savings over time.
- Don’t make choices you will regret later.
Sixteen percent of those changing jobs rolled their 401(k) into an IRA, and almost all said they would make the same decision again. Compare that to those who cashed out. More than half of that group expressed regret and said they would not make the same decision again. Remember — money rolled into an IRA can keep growing tax deferred.
- Don’t let inertia drive your retirement savings.
The American Express survey found that one out of every four workers left their retirement assets invested in their former company’s plan. Another choice when changing jobs is to roll your 401(k) into an IRA. IRAs allow you to choose and diversify your investments, provide continued tax-deferred growth, and consolidate your retirement accounts for easier tracking and control.
- Do the math.
Have you ever calculated how much money you’ll need for retirement? Given increased life expectancy for many Americans and the weakened economy, it is a good idea to calculate how much money you need to save each year in order to meet your retirement goals.
- Get help.
Learn what your options are for retirement savings. Talk to a knowledgeable financial advisor, ask your company about financial education resources, or just surf the next starting with or simply learn more at sites, such as https://retireplan.about.com, www.quicken.com, https://money.cnn.com/retirement/ or the billions of other sites you’ll find with quick Google search.
This article was last modified on December 14, 2022
This article was first published on January 7, 2003
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