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Other Articles
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Pensions
Take Advantage of that Employee Retirement Plan
By Terry Hill
Financial Consultant, Terry Hill & Associates
Your company retirement plan is probably the most important yet overlooked investment tool available for a successful retirement. Let’s take a look at the most common company plan the 401K.
No other investment you will ever make will give you the advantages of your 401k plan. Contributing money to a 401K gives you an immediate tax deduction, tax-deferred growth on your savings, and usually a matching contribution from your employer. This is pretty amazing when you think about it. If your employer matches even 50% of your contribution (which is fairly common), you make an immediate 50% on your investment and that’s not even taking into account the tax advantages. No other investment will offer you that kind of benefit. So how do you take advantage of this powerful tool? I have come up with five key points to get you started.
Know your plan
It’s very important to understand how your plan works. What are the investment options available though my plan? What type of plan is it? Is my plan portable (most plans are) and how do I move my money out of the plan? Another very important question is who is the beneficiary of my plan. How do I set up or change a beneficiary? In other words, where do I want my money to go upon my death? Remember knowledge is power and knowing how your plan works is critical. If you need help talk to your financial consultant to help you. Most advisors do not charge for this service if you are a client.
Don’t count on a single retirement income source
If you have not calculated how much you are going to need for a comfortable retirement now may be the time. Most financial web sites have a retirement calculator. If you cannot find one I have one on my web site at www.lpl.com/terrence.hill. What you may find out is that a 401K is not enough. For many investors contribution limits make it impossible to meet their retirement goals. Setting up a plan for retirement should be sooner than later which brings us to the third point.
Early money earns the most
This seems obvious but you may be surprised by the amount of the difference. Here is a hypothetical illustration that assumes a 9% annual rate of return. An indivual saving 6% of a $36000 salary with a 3% company match would attain the following results by age 65 depending on the indivuals age when they started
Age 32 $854,945
Age 35 $641,310
Age 38 $477,692
Of course this assumes no particular investment and is not an investment recommendation, but you can see how soon you start contributing to your plan is much more important than how much.
The secret to wealth is to pay yourself first.
Paying yourself first is the concept of putting money away for savings or retirement before paying any bills. Unfortunately, many of us have grown up to believe that savings should be what’s leftover after paying all the bills and satisfying all our wants and needs. In actual practice of course this pay yourself business is not an easy thing to do. In fact it seems almost impossible. But contributing to a 401K Plan is a wonderful way to make sure we get into the habit of paying ourselves first. A 401K makes it easy to follow the pay yourself first philosophy. We tell our plan administrator to deduct 6% or whatever amount we chose, and presto, our money comes out before we even see our paycheck. Our instructions remain in place as well so we continue to build wealth.
Focus first on the goals that matter
Retirement as most things in life require adequate planning. Setting up goals and following a plan means it’s much more likely that you will be successful. A classic book on success “ Think and Grow Rich” by Napoleon Hill preaches the gospel of goal setting. Hill states, “Whatever the mind of man can conceive and believe can be achieved.” You probably won’t be able to achieve all your retirement goals. So identify your goals clearly and decide which are most important. By concentrating your efforts, you have a better chance of achieving what matters most.
Securities offered through Linsco Private Ledger a registered investment advisor. Member NASD/SIPC.
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