Many Americans are lucky enough to work for companies that offer their employees some kind of savings plan.
Plans offered by your employer can be a good way to save for retirement. With tax-deferred compounding and, in many cases, matching funds from the employer, many people find that they can save a lot more through an employer-sponsored plan than they could on their own.
The 401(k) plan is the most well-known retirement savings plan for people who work for companies in the United States. A similar plan, called the 457 plan, is made for people who work for state and local governments. There are 403(b) plans for schools, churches, and charities that don't have to pay taxes. Whether it's a company 401(k), a government 457, or a 403(b), these plans are called "defined contribution plans." This means that the amount of money you'll get when you retire is set by how much you put in.
The best thing about defined contribution plans is that you can choose how much to put in (up to the IRS limit of $15,000 in 2006) and how the money is invested among the options in the plan. Some people are comfortable figuring out how to invest in their retirement plan on their own, but many would rather have a financial professional help them choose investments that fit with their personal investment strategies, time horizons, and risk tolerances.
ING, one of the country's leading providers of employer-sponsored retirement plans, explains how employer-sponsored retirement plans make it easier to save for retirement:
• Payroll deductions are convenient because your employer takes the amount you choose right out of your paycheck and puts it in your retirement savings plan. This automatic feature helps a lot of people stay on track with their retirement savings.
Pre-tax contributions: Your total income tax is calculated on a lower amount, which makes your tax burden a little lighter and gives your savings plan more room to grow. You don't pay income tax on the money you put in or make until you take it out. For early withdrawal, there may also be a 10 percent federal penalty.
Some employers will match what you put into your retirement account, which is like getting "free money."
Workplace retirement savings plans allow contributions of up to $15,000. This gives people who may be a little behind on their retirement savings goals a chance to catch up a little faster than they could by investing in a Traditional IRA, which also offers tax deferral but has a current contribution limit of $4,000.
Professionally managed investment options in the plan are in charge of the strategy, goals, and management of the investment funds that make up the plan.
An employer pension plan is another way to get money in retirement, but these plans are becoming less common in this new era of planning for retirement. Pension plans, which are also called "defined benefit plans" because the employer promises to give you a certain amount of money every month after you retire, are becoming less common because they are hard to set up and expensive for the employer to pay for. Even so, some employers still offer pensions. For example, many teachers have pension plans paid for by their employers, but these plans are becoming less common.
Without the big pensions of the past and an uncertain future for Social Security, many retirees may not have enough money to live on. No matter what plan your employer offers, you should give it a lot of thought and invest as much as you can, choose your investment options wisely, and keep an eye on and change your investment options as your investment strategies or the market changes.
Remember that you are in charge of your own financial security.
