SNINS1013
Are You Fully Realizing the Benefits of Your 401(k) Plan.
Years ago, many companies offered lucrative pension
programs that were a tremendous benefit to employees,
especially those who had accrued a number of years
of service.
In today’s corporate environment, however, pension
plans that are funded exclusively by companies are
becoming increasingly rare. In fact, according to research
from consulting firm Towers Watson, just 30 percent of
Fortune 100 companies currently offer a defined benefit
pension plan to new salaried employees. And, with
uncertainty surrounding the future of Social Security,
retirement planning is more important than ever. A 401(k)
plan can help.
The 401(k) is a defined contribution retirement plan
named after a section of the Internal Revenue Code. With a 401(k) plan, you can usually contribute a
portion of your paycheck on a pre-tax basis, and earnings on contributions are allowed to grow on a tax-
deferred basis until you withdraw the funds, usually at retirement.
Whether you’re first considering enrolling in your company’s 401(k) or have already begun making
contributions to a plan, it is important to fully understand some key aspects of 401(k)s.
The Earlier, the Better
The earlier you begin contributing to your 401(k), the better. And if you’ve already started, it’s important
to keep contributing on a regular basis. Procrastinating can have a big impact on your retirement savings
over the long run. Consider the following example:
Katie and Susan both work for the Widget Company and both earn a salary of $50,000. Katie begins
contributing 10% of her salary to the company’s 401(k) plan at the age of 25 and continues to do so until
her retirement at 65. During this 40-year span, Katie has received an average raise of 3% per year, and
her investments earn an average annual return of 6%. At age 65, Katie will have $2,074,326. Susan also
contributes 10% of her salary, but waits until she is 30 years old to begin doing so. During Susan’s 35
years of contributing to her 401(k), she, too, receives an average 3% annual raise and earns an average
return of 6% on her investments. At age 65, Susan will have $1,329,930 in her account. As you can see,
had Susan begun investing earlier in her career, as Katie did, she would have earned an extra $744,396.
Of course, this is a hypothetical illustration only and does not reflect actual performance of any particular
investment.
Currently, 401(k) plan participants can contribute up to $17,500 annually. Furthermore, individuals age
50 or over in 2013 can make an additional “catch up" contribution of $5,500 annually. And remember,
your contribution to your 401(k), up to the allowable limit, is deducted from your paycheck before taxes
are withheld, thus reducing your overall taxable income.
Investing Made Simple
One of the many advantages of a 401(k) plan is the ability to invest a set percentage of your salary
or dollar amount on a regular basis. By setting up an automatic payroll deduction for your 401(k)
contributions, you will be able to “pay yourself first" by putting money in your 401(k) before you
could be tempted to spend it elsewhere.
Investment Strategist
Investment Strategist