Retirement Planning – The 401k Retirement Plan

Out of sight, out of mind. That’s sort of how the 401k retirement plan works. You sign a contract and your employer deducts a certain percentage of your income (before taxes) that gets tucked away for your retirement. Sometimes, if your employer is particularly wonderful, they will agree to match your contributions, so your final pay-out will be double what you put in.

What makes the 401k retirement plan different from other pensions is its flexibility and the amount of control you have over it. Some choices include: What percentage or flat monthly rate do you want to contribute? Also, where do you want to invest? Your employer will provide you with a list and you can choose between stocks, mutual funds, bonds, money market investments, company stock or any combination of the aforementioned. You may also select a financial adviser to make the choice for you. As with anything in life, there are risks. If your company goes bankrupt, you may lose a huge portion of your retirement savings, especially if you’ve invested heavily in company stocks. You may decide to take a more active role in where your money gets invested because some annuities may be losers, while others are winners. Generally, it’s recommended to diversify where your money goes so you don’t “put all your eggs into one basket.”

There are two types of 401k retirement plan benefits you may receive. Some prefer the greatest investment potential of a defined contribution plan, while others like the stability of a defined benefit plan. Check with your employer to see which one is offered or what options you qualify for. Also, you may opt for monthly payments or a lump sum payment.

When you leave a company, generally your 401k retirement plan remains active for the rest of your life. If you feel uncomfortable leaving your savings in the care of your ex-employer, or if your company charges a fee for leaving your account with them, you may rollover 401 k benefits into an Individual Retirement Account. Look into the rollover 401 k if you’re changing employers too. You’re allowed to draw on your 401k retirement plan after age 59 1/2 and you will then pay taxes on what you take out. Most plans have a minimum distribution requirement you must abide by, meaning that once you reach age 70 1/2, you’ll have to start to withdraw some of your money, unless of course, you’re still working. The only plan that is exempt from the minimum distribution rules is the Roth IRA. You may decide to take a crash course in investing and take a more active role to ensure maximum returns.

To learn more about the 401k retirement plan, you can purchase retirement planning software like Quickbooks, or investigate retirement planning services at places like Fidelity Financial. The best thing you can do is to invest wisely, diversifying where your money goes or devising a supplemental retirement plan in case your 401k or pension doesn’t turn out the way you had hoped.

Published by The Money Manager

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