Personal Financial Management is a topic that is growing in
complexity. It seems like more financial and insurance
investment products are available every day.
We really don't know what benefits may or may not be
available to us in the U.S. from government programs in the
future. So it's not wise to count on those programs for
future income in whole or probably even in part.
Many people are simply unprepared and uneducated about how
to implement long-term investment plans for their future.
It's critical that everyone have at least a basic
understanding about how to accumulate and preserve personal
wealth.
Financial Management is a very broad topic, but I'll focus
on the two major types of retirement plans that may be
available to many of us in the workplace. I want to
explain the two types and encourage you to participate in
them if you aren't doing so already.
The first is called a Defined Benefit Pension Plan and the
second is called a Defined Contribution Plan.
A Defined Benefit Pension Plan gives the participant a
specific monthly benefit at retirement. It could be an
exact dollar amount or it could be calculated using a
formula that considers the retired employee's salary and
length of employment with the company.
The important thing to remember about a Defined Benefit
Pension is that the investment decisions are made 100% by
the employer on behalf of the employee. The employee
doesn't have to save a dime out of their paycheck or even
think about how to best invest this money, because they
never see it.
For a Defined Benefit Pension, the employer takes all risk
and responsibility to make sure that they'll be able to
fully pay all retired employees who qualify for the
benefit. They use the services of an Actuary to make
complicated calculations that forecast their future income
needs for all employees who are likely to qualify for
retirement benefits.
The catch is that the length of service to qualify for
Defined Benefit Pensions is usually very long. If an
employee leaves the company prior to the required length of
service, they lose this valuable benefit. Fewer and fewer
employers offer Defined Benefit Pensions because they're
very costly.
If you have a Defined Benefit Pension Plan with your
company, consider yourself fortunate!
The second and most common type of retirement plan is the
Defined Contribution Plan. These provide an individual
account for each participant. You may know these as 401(k)s
or 403(b)s, for example.
A 401(k) plan allows an employee to have their employer
contribute a portion of his or her cash wages to the plan
on a pre–tax basis.
A 403(b) plan, also known as a tax-sheltered annuity (TSA)
plan, is a retirement plan for certain employees of public
schools, tax-exempt organizations, and clergy.
The benefits are determined by the amount an employee
chooses to contribute, up to a yearly maximum set by the
IRS. For 2007 the maximum contribution to a 401(k) is
$15,500. Participants have a certain degree of control
over the investment choices and can conveniently fund them
through payroll deductions.
Many employers who offer a 401(k) to their employees also
throw in an added bonus to encourage investment. They'll
match a set portion of the employee's yearly investment.
If you leave the company, you can take your 401(k) money
with you and "roll it over" into a new plan.
Understand that the portion of money that was given to you
from the employer in the form of matching usually has a
vesting schedule tied to it. So this means you may forfeit
all or a portion of those matched funds depending on how
long you were with the company.
However, there are some 401(k)s, with what's called Safe
Harbor plans, that allow for full vesting of all employer
contributions. If your employer has a Safe Harbor 401(k),
you get to take 100% of your matched money with you if you
leave the company.
If you have the option to invest in a 401(k) or 403(b),
don't take it for granted. Make sure to at least invest
enough money each year to optimize the employer's match to
you.
If you own or manage a small business, putting a 401(k) in
place may not be as expensive as you think. The one-time
activation fee and annual administration fees can be as
little as a total of $1,500 per year.
Over time, there has been a shift from Defined Benefit
Pension Plans to Defined Contribution Plans in the
workplace. This shift has resulted in a big challenge for
many average people because the result is a transfer of
risk and responsibility for creating retirement income from
the employer down to the individual worker.
Never procrastinate investing for your future because you
think you don't have enough to invest right now. You can't
think that you'll invest once you get that promotion or
land that big account.
You'll come out ahead if you invest a little bit on a
regular basis right now rather than waiting to invest a
larger amount in the future. When it comes to Personal
Financial Management, time is of the essence. So, the
biggest secret to building wealth is simple: to get ahead,
get started!
----------------------------------------------------
Laura Adams is the host of the popular MBA Working Girl
Podcast. The content combines brainy business school theory
with real-world business practice from her career as a
business owner, manager, consultant and trainer. Subscribe
for FREE to this top-rated show and get the useful MBA
Essential Tip at http://www.mbaworkinggirl.com
No comments:
Post a Comment