Shine Up Those Golden Years

April 14, 2006 - I recently met with a group of individuals at a private school that is starting a 401(k) Plan for its teachers. Their ages range from mid-twenties to sixty and, being educators, they are highly intelligent. Yet, these dedicated teachers were lacking "book learning" about retirement plans and investing options. Perhaps a recap of our experience there may be helpful to those of my readers who either are fortunate enough to already be participating in some form of retirement plan, or, if not, then perhaps this could be a lesson learned. So, "students," sit up straight and please pay attention.

There are a number of employer-sponsored retirement plans available ranging from very basic small company plans that may include only a very few participants to rather sophisticated plans that cover thousands of employees totaling in the billions of dollars. The most popular are SEP's (Simplified Employer Plans), Simple Ira's, 401(k)'s, Profit-Sharing Plans, Money Purchase Plans, 403(b)'s and Defined Benefit Pension Plans. I'd be pleased to discuss the differences with you if you're interested.

My illustration is that of a very small start-up 401(k) Plan of a for-profit pre-school. The administration is not in a position, initially, to provide a match, that is, a discretionary percentage of the amount the employees may defer from their salary. Thus the employee may defer, in 2006, up to 100% of their gross salary or $15,000, whichever is less. If the participant is over 50 an additional $5,000 may be deferred. This deferral can be either pre-tax, thus reducing the amount of the employee's taxable income, or if it's a Roth 401(k), then the contributions are after-tax, and, when the employee takes distributions at retirement, the full amount is not subject to federal tax. If the contributions are pre-tax, then the distributions are fully taxed. In either case it's a great boon for funding those "golden years."

Let's look at the chart below. A 47 year old, with a gross income of $60,000 who defers 20%, by age 65 would have amassed nearly a half-million dollars. Just think, if he or she began at age 27 that figure could have grown to almost $3 million, based upon an average 25% tax and an annualized return of 8%. These projections also don't take into account changes in salary.

The point should be very clear. The earlier you begin to save the more you should be able to have for your retirement - those "golden years." The longer your time horizon, the better your chances of amassing a solid retirement foundation. Our belief, which is widely held, is that Social Security accounts for about 40% of household income, and the balance must be provided by your pension/retirement plan, savings and other sources. The key, dear readers, is to plan for the future, and it's never too late. In a future column I will present the results of a study based upon a survey of nearly 2,000 retirees, and you'll want to know learn more from the "horses' mouths", so stay tuned.