Only a generation ago, many people could look forward to a secure retirement, as long as they devoted much of their working life to a reliable and stable company. For our grandparents, retirement meant a check in the mail every month, and often included health insurance coverage for the rest of their lives.
Today, retirement looks a lot different, even if you spent years working for the same company. In the 1980s companies started to realize that they were creating pension obligations they could not afford to pay without impairing the future of the company. These companies still wanted to offer benefits so that they could attract quality employees, but the cost of doing so through traditional pension programs became untenable. The answer was the 401k. With this type of plan, employees are able to contribute to their own retirement account which offered an array of investment options to suit each employees investment objectives. In many cases the company offers a “match,” meaning the company contributes a percentage of what the employee contributes.
To ensure that you have a financially secure retirement, there are a few things you will need to consider.
- The first is that no matter what you hear about the 401k plans, it isn’t going to solve all of your financial problems. For the majority of people, it is probably best to contribute as much as you are allowed each year. This will also maximize your employer’s matching contribution. If your employer doesn’t offer a 401k plan, it may be a good idea to consult with a financial advisor to see if you have a better option for investing your money.
- The 401k plans are not magical solutions to taxes. Like IRAs you will have to pay taxes on this money when you begin withdrawing it during your retirement years.
- Find out if your plan offers a Roth option. This allows you to contribute after-tax dollars to a plan that will be tax-free forever.
- In the event that you do stop working for that company you will want to find out how to transfer your balance to your new employer’s 401k or into an IRA account. The IRA account may offer more investment and distribution options that you can tailor to your specific needs.
The key for retirement planning with your 401k is to start early and maximize your annual contributions. In addition, you should explore other methods of investing for retirement, even if you use them in conjunction with your 401k. If you are planning for retirement, it is a good idea to retain the services of an experienced financial advisor.