Retirement Planning Made Simple

Retirement is the single biggest financial issue facing American’s today. Whether we work for a company, a non-profit, or are self-employed, there are a number of different retirement plans available.  I suggest to all my clients thatwe try to save 15% of their income, with 10% going into their retirement plan.  Of course, the younger you start, the better off you’ll be in the end.  You are never too old for creating Financial Freedom, and if today is the day you are making the commitment to plan for your own future, then get out the champagne, give yourself a toast and start taking notes.

There are two types of retirement plans, tax-deferred and tax-free.  Most retirement plans allow for both options, and with IRA’s you have both traditional IRA’s (tax deferred) and Roth IRA’s (tax free).  I recommend that all my clients plan on having a portion of their retirement income taxable and a portion tax-free.  Some of the tax free options available today may not be available in the future, so its important to take advantage of them while they still offer the huge tax incentives they do.

Company Sponsored Plans:

Employer sponsored plans, such as 401k, 403b, 457 and Thrift Plans, allow you to deduct a portion of your paycheck pre-tax and deposit that money into a tax-deferred retirement plan.  That offers you two advantages, one in the immediate and one as the money grows.  In the immediate, the pre-tax contribution is tax-deductible (up to certain limits, again check with your CPA based on your income).  This means that if you make $60,000.00 a year and you contribute $6,000.00 a year to your 401k, the taxable income reported to the IRS is $54,000.00.  That’s right, it comes right off the top.  If you are in a high tax bracket, you will want to maximize any possible tax-deductible contribute you can make based on your income contribution limits.  The second advantage to all retirement plans is tax-deferred growth.  As you invest your money in your retirement plan in a well diversified portfolio, over the long run, through the magical power of compounding interest and some loving attention, you will see your retirement account grow.  The gains you have in these accounts, including if you place sells, buys or exchanges, will not be a “taxable event”.  That means that you will be no taxes on this money no matter how well it does until you take it out, ideally after 59 ½ which is the age you able to begin taking deductions without IRS penalties.  

If your company has a matching plan, find out the details on their maximums, and make sure you do everything possible to receive every matching dollar you can.  This is really part of your compensation, when you look at the big picture.  Some companies match you on a portion of what you contribute, some match dollar for dollar (very rare these days), some have a profit sharing plan in which they contribute a lump sum annually based on the profits of the firm, your salary level and other criteria.  

Every company sponsored plan has a list of investment options available to you.  This will generally include a list of mutual funds that are offered by the financial services company that is servicing the plan.  Ideally, this company will offer good objective advice on what funds would be the best choice for you, based on your age and risk tolerance.  Sadly, most employees are not made aware of this resource, even if it is available, and are left to their own devises to choose investments for their accounts.  Mutual funds receive a “star ranking” by a company called Morningstar.  The highest rating a fund can receive is five stars.  This rating is based on longevity, performance, volatility and management.  There are often “target date” funds offered, which essentially create an ideal portfolio for a woman that plans to retire in the 2035.  While these funds are a good idea in theory, they are largely autopilot, and will make adjustments to your asset allocation (fancy phrase for risk level) in your portfolio as you age.  It is always better to get face-to-face assistance in choosing your investments.  Many Advisors will assist you in choosing funds for your retirement plan even if they don’t hold it at their firm, as you are their client, and they also hope to have you roll your 401k over to an IRA with them when you retire.  

Rollovers and Transfers occur when you change jobs, retire, are terminated or quit.  These are referred to as “life triggering events” and generally allow you to roll your retirement assets into an individual IRA outside of the company plan, or into your new company’s 401k.  You many run into roadblocks on whether you can keep the money invested as it is, as not every firm can hold every investment.  For example, if you own a fund that is a proprietary fund of Goldman Sachs, you may not be able to roll that into a plan that is administered by Lord Abbott, in which you must be invested in Lord Abbott funds.  This can create a predicament if you are forced to liquidate, and then repurchase new investments, thus incurring sales charges you could have otherwise avoided.  If you are changing jobs, and discover that your 401k must be liquidated in order to transfer it, I would recommend you open up an individual IRA at a brokerage firm, and confirm that you can transfer your assets “in kind”, meaning they will hold your investments for you at their broker/dealer, without the need to liquidate and repurchase.  

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