Financial Focus: Take Steps to Supplement Your Retirement Plan
Take Steps to Supplement Your Retirement Plan
Many people are finding their employer-sponsored retirement plans are falling short of providing the expected level of benefits.
This is clearly a scary prospect for many workers. Consequently, you will want to act now to bolster your retirement savings.
Before we look at some moves you can make, let's review two factors behind the current concerns in company-funded plans:
_ Economic pressures- For a variety of reasons, pension plans are becoming more expensive for companies to fund; consequently, some plans go underfunded. As long as a company remains solvent, its pension plan--even an underfunded one--will pay out full benefits, but the financial pressure on the company to fully fund the plan is enormous and can cause a drag on earnings. If companies are in danger of insolvency, they may not fund their pensions. When a company terminates its plan, participants still won't lose their benefits, but they will lose out on potentially valuable future accruals, which typically correspond with age and length of service.
_ A switch from "defined benefit" to "defined contribution"- In 1979, more than 80% of workers covered by a company retirement plan had a "defined-benefit" plan--that is, a traditional pension that paid monthly benefits based on years of service. By 2001, this percentage had dropped to just over 40%, according to the Center for Retirement Research at Boston College, as companies began offering "defined contribution" plans, such as 401(k)s. This shift from defined benefit to defined contribution means employees are now much more responsible for planning and saving for their own retirements.
What You Can Do
You cannot control "big-picture" events, such as a plan termination or switch. However, you can take steps to boost your retirement savings. Here are a few ideas:
_ Prioritize and quantify retirement goals- You'll be far more likely to save for your various retirement goals if you rank them in order of importance and determine how much they are likely to cost. You may want to get help from a qualified financial professional.
_ "Max out" on your IRA- Try to fully fund your Roth or traditional IRA every year. A Roth IRA grows tax-free provided you meet certain conditions; a traditional IRA grows tax-deferred.
_ Consider delaying early retirement -If you enjoy your work, consider extending your career by a couple of years or taking advantage of "phased retirement." You'll be able to contribute more money to your employer-sponsored retirement plan.
_ Increase 401(k) contributions annually- Commit yourself to increasing your 401(k) contributions each year, especially if you get annual raises.
_ Don't "overload" on company stock- Avoid putting too much company stock into your employer's retirement plan; you could incur significant risk if your company goes through some ups and downs. Most financial experts recommend limiting company stock to 10% of your retirement plan assets.
You can't predict what will happen with your employer-sponsored retirement plan. But by following your own savings and investment strategies, you can go a long way toward achieving the retirement lifestyle you've envisioned.
This article was submitted by local financial representatives of Edward Jones.