The Do-It-Yourself Pension
Add comment February 25th, 2008
Jerry S. Korabik, CFP®, AIFA®
As many of you are aware, the days of defined benefit plans or “company pensions” have gone by the wayside for many companies and their employees over the last few decades. Every couple of weeks you read more and more about major companies closing their Defined Benefit plans, or converting them to Cash Balance plans, the new hot face in so-called “defined benefit” options. Since the late 80s, there has been a continual decline in the number of participants covered by these traditional pension plans. Couple that with the continual concerns of the Social Security system and you have created the need for a “do-it yourself” pension. This is not your father’s pension plan, call it the next generation of retirement income planning.
At this time of year, when taxpayers are scrambling to get statements and tax documents in order to file their returns, it may make sense to do a Retirement Plan checkup before April 15th as well. Why? Because April 15th is the cutoff to fund up last year’s IRA contributions to traditional IRAs and Roth IRAs. Also, it is still pretty early in the current calendar year, making it important to revisit your company’s 401(k) plan options as well. It’s important to look at all the options available to you and develop a plan to try to maximize your current contributions to these plans. You want to be able to maximize your contributions now, so that you can afford to live a long and financially secure retirement. Although, keep in mind you want to be able to do this without living in the poorhouse today.
“Do it yourself” means we are forced to take a more active role in providing for our own retirement future because odds are, no one else will. We are given many tools that enable our saving for the future, from company 401k plans to individual IRA accounts. The IRS adjusts what you can put into your IRAs and 401ks every year, usually for some cost of living adjustment. For 2008, you can contribute $5,000 to an IRA account, $6,000 if you are age 50 or over. Income restrictions do exist. So depending on your filing status and your Adjusted Gross Income, you may or may not qualify for a traditional tax-deferred IRA or a Roth IRA in 2008. See IRS Publication 590 for more information on the limits. www.irs.gov
For a 401k, the most you can put in for 2008 is $15,500 through your payroll contributions. This limit does not apply to any Profit Sharing contributions or matching contributions your employer may put into your account. If you are age 50 or over, there is also a “catch-up” provision allowing you to contribute an additional $5,000 to your plan to allow you to save more for retirement at a quicker pace. IRS Publication 575 covers a lot of the detail you need to know when it comes to company benefit plans, limits, and restrictions. www.irs.gov.
In order of priority, take advantage of your 401k plan first, especially if your employer matches your contribution. If there is a match, you’d hate to leave free money on the table. Then after you’ve maxed out your 401k, consider the IRA route if you qualify.
When it comes to planning a “do-it-yourself” pension, the more we can put away for retirement, and the earlier we can do this, the better. In addition to being forced into doing it ourselves, we also need to focus on the fact that we are living a lot longer than our parents and grandparents. Medical technology and research is keeping us alive a lot longer, and in order to survive the higher cost of healthcare, we need to take a more active role in saving now, while we can and not wait until it’s too late. We have a lot of tools available to make the “do it yourself” pension work for us. The time to start is now. In fact, it’s also a good time of year to do an overall financial planning checkup to see whether you are on path towards your retirement dreams.
One final tip, whether you are investing in your company 401k or an IRA, make sure your investment portfolio is invested wisely. A well-diversified portfolio of stocks, bonds, and cash is the best defense against loss—both market loss and inflation loss. For help, check with your plan administrator or consult an investment advisor.
