401(k) Planning: Unveiling the Three Parties that Influence Your Retirement Plan
In speaking to new college graduates, young professionals and people changing careers, they usually look for a few things in an employer. These are a good base salary, health insurance benefits and a solid 401(k) retirement savings plan…oh and, uninhibited access to their Facebook page too. HA! Ok, let’s get serious…
If there is anything that this recession has taught us, it is to look at our personal finances in a different light, a new perspective, a new angle. Only then, can we see the obstacles we had been facing all along without even knowing it.
You see, back in the day, company employers were supposed to tuck money away for you and they would invest and grow a pot of cash in order for them to pay you for the rest of your life. This was your benefit after commitment your loyalty, or as they say, completing your “time in service”.
For most companies that ranged between 20-30 years and this was called a pension plan, or technically speaking, a defined benefit plan. They were obligated to pay you a monthly paycheck (commonly called a “pension income”) for the rest of your life. Upon your death, an income from your pension would continue on to your spouse, until her death. (Nope, the kids don’t get anything after this event!)
Now, when you take time this weekend on a romantic get-a-way to Lake Geneva with your spouse, in order to review your 401(k) statements (yes, I’m being sarcastic), you should realize that your favorite Uncle and his buddies want something out of your hard-earned, lifelong savings too. C’mon, did you really think that your employer wanted to look after your own financial well-being? Really? There’s something in it for them too!
Your Employer
When it affects their bottom line, employers are quicker to make decisive decisions and change, than the common person. After all, they have shareholders, a board of directors and their own interests to protect. Global competition over time has stimulated American businesses to streamline, shift costs and now, push the responsibility of retirement planning to employees. They have done this by placing their future in their own hands by providing a 401(k) plan, who were lacking the financial literacy to understand the basics of saving and investing.
Yet, employees from within the company will experience varying rates of return on their individual 401(k) plans based on the investment choices they have made throughout the year. However, is it fair that the CEO may end up with a higher rate of return on his plan than the janitor? Brooks Hamilton calls this, “yield disparity”. I’ve mentioned in a previous post that this leading 401(k) and pension expert has felt that this destroys a common person’s ability to retire in financial dignity.
Here’s the problem…due to the advancement of modern medicine, the movement of health and wellness being thrust forward into consciousness of Americans causing everyone to live a longer life, companies looked at paying you for the rest of your life with a pension, as a huge problem. The faced having to pay retired workers longer than expected (yes, they would rather you die shortly after retirement so they can stop paying out monthly pension income benefits) and the high cost of continuing to maintain a pension for younger workers.
Are you starting to see your 401(k) plan a little differently now? I hope you didn’t think that your company retirement plan was solely supposed to benefit just you. Nope. And in the words of the famous radio personality Paul Harvey, let me share with you, “the rest of the 401(k) story!” (Yes, I think I just dated myself…I believe the term is, “I’m old school!”)
Our Government
Did you really think that your favorite Uncle (yes, it’s Uncle Sam!) was giving you such a huge tax-incentive by allowing you to save in a “tax-deferred” plan? What you should be really concerned with is the tax bill you will get in your post-59 1/2 year old, golden years as you hope to have an income source you will never outlive.
How about that talk with your HR department, fellow employees or the 401(k) plan enrollment advisor giving you the, “contributing-to-your-401(k)-plan-means-your-income-tax-bill-will-be-less-come-April-15th” speech.
Taxes that you face today will nothing compared to the taxes you may face tomorrow.
Have you really taken a step back to look at all the pieces of the financial freedom and independence puzzle? Aren’t you looking forward to the independence of living where you want to live, doing what you want to do and carrying out the purpose and plan that God has ultimately given you? YES! I know you want and desire just that.
But it is going to be very difficult to do it with the two other parties that are eventually going to weigh your financial dreams, plans and hopes down. It will be very difficult to run a 100-yard dash with the baggage these other two parties place on you. You can’t live your life in dignity always knowing that your favorite Uncle will always have his hand out every time you take a dollar out of your personal retirement savings plan.
YOU!
In this country, we can pursue higher education to obtain our college degree, a master’s or even a PhD. But when it comes to a financial education in personal finance, most learned professional students will tell you that they are VERY financially illiterate.
I can’t tell you how many well-to-do, highly educated academics I share a conversation with who have very little idea how their company 401(k) retirement plan works. In fact, I met with a retiring scientist from a well-known laboratory in the Chicago suburbs. I asked him if I can quickly review the forms for him to roll his 401(k) into his own, individual retirement account (IRA). “No Matthew, I’ve been a scientist for 40 years! I can fill out a simple form!”, he says.
Well, I let his excellency fill out the form by himself and just before he faxed it in I said, “Would you quickly allow me to scan over your form to make sure you didn’t make any mistakes?”
“Sure!”, he says.
I looked at his form, noticed an error and replied, “Ok, Dr. Scientist of 40 years. Go ahead and fax this form in. Just be ready to pay Uncle Sam $60,000 is taxes by next April 15th.”
“What do you mean?”, he says.
“Well, not only did you fill out the form incorrectly. But you checked off the wrong boxes which triggers a major taxable event. Since you don’t need my help…just be ready to write a check for $60,000,” I retort.
As he looked at his 401(k) rollover form dumbfounded I ask, “What would you pay me if I can help you avoid this $60,000 tax bill?”
Well, needless to say, Dr. Scientist recognized that he mistakes in retirement planning are not only costly, but irrevocable. It’s not like falling off a bike and having a second, third or fourth try. He had ONE SHOT to get it right, the first time.
Many others come to us with stacks and stacks of unopened mail containing financial statements they do not even understand. Most are even afraid to take a look at them in fear of what their hard-earned savings accumulation has turned out to be, after hearing many of their friends complain about losing money in their own 401(k) plans.
We need to continue learning the basics of how money works, above and beyond what our high school home economics class taught us in how to write a check. Balancing a mock checking account in a classroom environment won’t get you very far when banks take real money from you from overdrafting your account by fifty cents.
The reality is, if we don’t take a proactive approach in how to best take advantage of what our employer can provide while working and harvest it to our best benefit…who will?
Would you like to have a brief, 30-minute financial review of your 401(k) or IRA plan with a Money Smart Coach? Instead of having a tax-deferred plan would you rather have a tax-free retirement plan?
Do you have questions about your personal financial situation that the 401(k) enrollment advisor may not have covered with you?
Give us a call at 708.686.2000 x8, leave a message and we will call you back to arrange a brief discussion. Or, you can email us: info@moneysmartradio.com
