A financially secure retirement is a goal of all Americans. Since many of us will spend one-fourth to one-fifth of our lives in retirement, it is more essential than ever to begin preparations at an early age. Most financial planners report that an individual requires about 75 percent of his or her preretirement income to maintain the same standard of living enjoyed during one's working years.
Social Security, employer-sponsored retirement programs and personal savings are the three sources of postretirement income.
Social Security Benefits
Social Security provides retirement benefits for most persons employed or self-employed
for a set period of time (currently 40 quarters; about 10 years). Benefits paid at retirement,
traditionally age 65, are based on a person's earnings history. Payments may begin at age 62
at a reduced rate or, if delayed until age 70, at an increased rate.
For a person with earnings equal to the U.S. average, the benefit will be about 40 percent of pay. For someone with maximum earnings, the benefit would be about 25 percent of the portion of pay subject to Social Security tax.
Every worker should understand Social Security retirement benefits. By completing Form SSA-7004, Request for Social Security Earnings and Benefit Estimate Statement, you can receive a projection of benefits. Forms can be obtained through local Social Security offices or by calling 1-800-772-1213.
Employer-Sponsored Retirement Plans
A retirement plan makes good sense and can attract and reward key employees. The
benefits and tax advantages of supplementing Social Security with a qualified retirement
plan are significant. A qualified plan is one meeting Internal Revenue Service (IRS)
specifications. Currently, such contributions are tax deductible and earnings accumulate
on a tax-deferred basis. In addition, benefits earned are not part of the participant's
taxable income until received, and certain distributions are eligible for special tax
treatment.
Whether you are a sole proprietorship, a partnership or a corporation (employing many people or only yourself as the owner/employee), there are a wide range of options available. These can range from simple plans, which you establish and maintain, to complex versions, which require an actuary, attorney or employee benefits consultant. Accountants, banks, insurance and investment professionals, as well as other financial institutions, can provide information on pension plan products. A plan need not be complex or costly to establish. In fact, there are several versions that you can establish without any outside consultants.
Depending on whether you are self-employed, a partnership or a small corporation, the following plans are available:
Individual Retirement Accounts (IRAs)
The simplest plan; for the self-employed or for select employees.Keogh
A plan for partnerships or sole proprietors, offering greater contribution limits than other types of plans.Simplified Employee Pension (SEP)
A plan for sole proprietors and small businesses, offering flexibility and easy self-administration.Defined Benefit
A retirement plan for businesses with older, more highly paid employees.Profit Sharing
A flexible plan based on profits and contributions that can be discretionary from year to year.Money Purchase
A method for companies employing a high percentage of younger workers and desiring to make steady plan contributions.401(k)
The most popular plan today, providing employees with the ability to save for their retirement with pre-tax dollars. Offers maximum flexibility for employers at minimal cost.Employee Stock Ownership Plans (ESOP)
An ESOP can be used as a market for company stock, for financing the company's growth, to increase the company's cash flow or as an estate planning tool.
Where To Get Pension Information
While some plans offer flexibility from year to year and contributions can cease at any
time, others require a longer term commitment. A pension professional can propose options to
meet your needs. Check for pension professionals (Yellow Pages under Pension), accountants
or attorneys, independent insurance agents, banks, stockbrokers, or financial planners.
Questions To Ask Before Finalizing a Pension Plan:
- Does the plan require a given level of contribution each year?
- Do the plan provisions (eligibility, hours of service and vesting of employer contributions) meet current and future needs?
- What are the costs of establishing and administering a plan and trust, including providing annual employee reports? For how long are these costs guaranteed?
- What are the investment options offered? Which offer guarantees and which do not. What is the 10-year historical performance of the various investments?
- Are there any loads (charges) associated with deposits (front-end charges) or surrenders (rear-end charges) from the plan?
- Can employees make individual investment selections and what types of reports do participants receive?
