As part of a benefits package offered to employees, many employers provide retirement options. Two employee retirement plan options you can provide include a defined benefit plan and a defined contribution plan.
» Defined Benefit Plan
The defined benefit plan provides a pre-defined monthly benefit amount at retirement. This type of plan is a pension that is based on the highest average salary attained by the employee as well as the number of pensionable employment years they completed. The plan is funded by both employer and employee contributions, and the funds are invested for future earnings.
» Defined Contribution Plan
The defined contribution plan does not promise a specific benefit amount at retirement. The end value of the plan will depend on the amount contributed prior to retirement and how well the investments perform. Employees are responsible for their own account and determine how much to contribute and how the contributions are invested. Employers typically contribute to these accounts by matching a certain percentage of the employee’s contribution. Examples of defined benefit plans include the traditional 401(k) plan, SIMPLE IRA plan, profit sharing plans, and employee stock ownership plans (ESOP).
One of the lasting benefits you can provide your employees is encouraging them to plan now financially for their retirement. By investing the time now to plan their future finances, they will be able to achieve a secure, comfortable retirement. The following are a few recommendations both you and your employees can follow in preparing for retirement:
Determine your retirement needs. Estimates suggest you will need about 70 to 90 percent of your preretirement income to maintain your standard of living when you stop working. Being aware of the amount of money you will need will help you stay on track for a secure retirement.
Understand basic investment principles. A variety of factors will influence how much you will have saved at retirement, including inflation, type of investments, and how long your money has had time to grow. Pay attention to your investments and meet with a financial advisor on a regular basis to ensure you are staying on track to meet your financial goals. Diversify your investments to reduce risk and improve return. Knowledge equals financial security.
Contribute to your employer’s retirement savings plan. If your employer offers a retirement savings plan, start contributing. Set a goal to contribute at least enough to qualify for the full employer contribution.
Set realistic goals and stay committed. Set a realistic savings and investment strategy to meet your financial retirement goal. Start small if you have to and increase the amount over time. The sooner you start saving, the more time your money will have to grow.
Don’t touch your retirement savings. If you withdraw your retirement savings prematurely, you will lose principal and interest and possibly tax benefits. You may also have to pay withdrawal penalties. If you change jobs, don’t withdraw the savings; instead, roll them over to an IRA or your new employer’s plan.
Invest in an Individual Retirement Account (IRA). There are two IRA options - traditional IRA or Roth IRA. The tax treatment of your contributions and the after-tax value of your withdrawal will depend on the type of IRA you choose. Annual contributions can be up to $5,000 and there are certain tax advantages in contributing to an IRA as well.
Learn about your Social Security benefits. Review your annual Social Security statement so you are familiar with how much your estimated benefit will be and when you can expect to receive it. On average, Social Security currently pays benefits that are equal to about 40 percent of what you earned before retirement. For more information, visit www.socialsecurity.gov.
Ask questions. While these tips provide suggestions for preparing for retirement, you need more in-depth information to determine your retirement needs and make sound investment decisions. Consult with a financial adviser for more detailed information and guidance.