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So really, who in their early twenties to mid-thirties is thinking about retirement?
The answer should be YOU!
My take on the whole retirement deal is that nothing is free or guaranteed. Not to mention it is way too far into the future. That DOES NOT mean under any circumstances you should be unprepared. If you are like me you do not trust in any form of social security being around when you retire. Then again you are reading this site, so who wants to retire at social security age anyway. No offense to those who have done so in the past but I hope to retire well before then.
Here I plan on going over some of the basics of retirement planning while hitting on the strengths and weaknesses of each. Be aware I do not hold any licensure or professional credentials regarding legal retirement planning. This means I get to be impartial with my thoughts and theories that I have spent considerable time researching.
401k
Retirement plan where you put pre-tax dollars into a tax deferred savings and investing vehicle. If you are lucky your employer will offer a defined matching plan such as 3%. If they match up to 3%; this would mean if you put 3% of your current pay into the plan the company will match another 3% to make your total amount contributed to 6%. Please note in order to be entitled to this other 3% from your employer you may be subject to vesting requirements. (Layman’s term: You need to stay on in good standing for a specified time period, usually 3 years or as defined by your employer.)
So your current employer does not offer a defined match, but they do stipulate that they offer a discretionary match. To a young professional this really means very little. If your employer is a small to medium size business that is either growing or just starting out the discretionary match is usually pretty low. The reasoning is the money is better spent on new equipment or employees to fuel further growth.
This brings us to the standard 401k where you contribute without your employer mentioning any kind of matching. In small to medium size businesses this is the most common.
401k Retirement Advice Tip #1
If your employer matches always contribute the maximum. If they match 5% you should contribute at least the 5%. Even if you think you will do not want to be with the company the required vesting period. (i.e. life happens you may just stay for longer)
401k Retirement Advice Tip #2
If your employer has a discretionary match, I strongly suggest you confide in someone who has been with the company for at least a few years and simply ask while filling out your paperwork what has the company traditionally matched and contribute this amount. If they traditionally match 2% your contribution should be at least the 2% of pay.
401k Retirement Advice Tip #3
No match, then only contribute what you are comfortable with. I say this because you are getting ZERO incentive to participate. My opinion is that you can put your money to better use through a mixture of personal and ROTH Individual Retirement Accounts, as well as investing in your future. What I am getting at is that if you are putting money say 5% into a non-matching 401k and do not own a house or any other investment vehicles or have other debt, drop your contribution down and work towards a more immediate goal. [See Investments for Ideas] I always get comments for this one and receive good feedback but it is my opinion based on being a young professional.
Employer Sponsored Pension
(Sorry I must laugh as the majority of young professionals do not have one of these.)
First Tier Pensions in my book:
Federal Pension – Civil Servants and Military
State Pension – If part of a state bargaining agreement through a union
Teachers Union
Employer Defined Benefit Plans – (Money is contributed to an account in your name throughout your time with the company as part of compensation)
Strong Unions – i.e. Teamsters, AFL-CIO, and other large unions excluding the UAW
Second Tier Pension:
Employer Pension Non-Defined – (Money is not contributed when earned and is a faith that your company will still be around and making money when you retire)
Weak Unions – I say any union that does not have the entire pension currently funded by the companies at which they represent the workers. Take for example the airline industry or the North American automobile industry, where pension defaults are continuously in the news.
Pension Advice Tip #1
If you are currently participating in a tier one pension, make sure you save in other ways to retire such as personal investments or IRA’s to make sure you are comfortable in retirement.
Pension Advice Tip #2
Check to see if the pension you are participating in is currently fully funded. The majority of Unions and companies must file the financials in annual reports. If it is not funded make sure you are preparing for retirement in other ways such as investing and Individual Retirement Accounts. Sometimes this could just be a short term issue but most of the time it can mean trouble ahead if the company is not contributing what it is supposed to. Remember other people who have already retired are going to be using up the funds that are already in the plan.
Pension Advice Tip #3
If you are not already married and plan on getting married check with your pension administrator to make sure your spouse or children would get your pension should something unfortunate happen. That being said if you plan on doing a pre-nuptial agreement make sure you discuss the pension as it is an important part of your future.
Personal Savings Account:
This subject is covered more in depth in the Money Section.
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