By JULIA OTT
Hopefully most of us take these words to heart and truly seize each day. My family just returned from a wonderful ski trip with friends where fun was had by all. With teenagers and youngsters on the slopes, parents were naturally concerned for their safety. However, watching my own children expend their boundless energy each day in God’s winter wonderland reminded me of the adage, carpe diem. As adults, we should follow their lead in our own routine lives and not just on special occasions.
We can take this spring break spirit and apply it to the financial portion of our lives as well. Saving and planning for the future are prudent choices, and ones that mirror biblical teaching. For example, Joseph stored grain before Egypt experienced famine. Similar to this would be a Realtor saving during the good selling months, to benefit in the slower times. Another prime example is saving toward retirement.
Most will agree that depending on the government for our total retirement needs is unrealistic. With the expectation of Social Security surviving intact for our own generation being low, individuals are charged now more than ever with taking control of their own retirement planning.
There are two primary avenues for retirement saving. The most efficient method is utilizing an employer-sponsored retirement plan. Most employer-sponsored plans fall under the qualified status, or pre-tax category. This allows for taxes on the contributions to be deferred, most often to the time of distribution. Alternatively, some employer plans offer an after-tax, or Roth, savings opportunity. In this plan, distributions are generally tax-free.
Examples of company-sponsored plans are 401(k), 403(b), 457(f), SIMPLE 401K and IRAs, SEP, Profit Sharing, Pension, plus several others. It is easy to get lost and confused by IRS terminology and acronyms, but the key takeaway point is to become familiar with your own employer’s plan design and opportunities for savings. Suffice it to say there are different characteristics within each plan.
Rules and governmental guidelines can be overwhelming, and they are constantly being revised, as administrations and tax laws change. To help cut through that barrier, employers are required to provide information to all eligible participants regarding plan design and structure, related investments, expense information, and certain planning tools for analysis, so that individuals can make informed decisions to maximize their retirement savings potential. This is the best place to get started if you are unfamiliar with what is available within your corporate retirement plan, or if you simply need a refresher.
Employee contributions are generally made in the form of payroll deductions and processed in the respective payroll cycle. Payroll deductions provide the ideal scenario in a long-term investment strategy, as they allow for investing at regular intervals in the markets. This process is referred to as dollar cost averaging, and is a proven, effective way to invest for the long term.
In addition to personal contributions, some employers provide a company contribution in the form of a match, direct dollar or percentage contribution. The match requires the employee to contribute part of their own pay in order to receive the company’s portion. The government sets the annual limits each year on how much individuals and companies can contribute within a qualified plan. Knowing the limits, individuals can map out a plan to maximize either the total amount allowed by law if they are in a position to do so, or create a strategy to save as much as their individual household budget will allow. Any contribution is helpful, especially given the long-term investment window for most retirement accounts.
Another retirement savings vehicle, and the second option to most people, is the Individual Retirement Account (IRA). As with corporate plans, the annual contribution limit for IRAs is defined by the government and is not as high as with corporate plans, but they still provide a good outlet for contributing either pre-tax or after-tax dollars toward retirement. Automatic contributions can be established to take advantage of the aforementioned dollar cost averaging.
Whether you are beginning your financial journey, or well along your way, take a moment to review your situation and take advantage of the opportunities available to you.
Julia Ott is the Director of Client Services with Mississippi Investment Management Company, LLC. She can be reached at firstname.lastname@example.org.