Simply Junior

Retirement plans are employee benefit plans that are set up or maintained by an employer or a union that will provide income after the individual worker retires. There are different types of plans, including the 401(k) plan, and the defined benefit plan.

Most people who work in the private sector are covered by ERISA, which is the Employee Retirement Income Security Act. ERISA provides some protections for those who participate in retirement plans. In addition, the individuals who manage the plans have to meet conduct standards under the responsibilities that are specified under the law.

The retirement plan set up by your employer is an essential part of your financial security in the future. It’s important that employees understand how their plans work, and what benefits they will receive. Just as you keep track of bank accounts, you should keep track of your retirement benefits.

The people who are responsible for the oversight and management of retirement plans have to follow certain rules that cover the operation of the plans, handling the money in the plan, and watching over the firms that are hired to manage the money. In addition, you should also understand and monitor your benefits.

There are two major types of retirement plans, and they are described as defined contribution and defined benefit.

A defined benefit plan is funded by your employer, and it promises you a monthly dollar amount upon your retirement. Plans like this may state the benefit as a dollar amount, or may calculate it through various formulas.

A defined contribution plan doesn’t tell you that you’ll get a specific amount when you retire. Instead, you or your employer put money toward your account and then these monies are invested. Most of the time, you are responsible for choosing how the monies are invested. In some plans, your employer will match your contributions.

Employers are offering you a benefit when they open retirement plans for their employees. Federal law does not require any employers to offer a plan, and the law also does not prohibit them from doing away with a plan they already have. Of course, if you have monies invested in a plan that your company terminates, the funds you put it will be available for withdrawal, or for rollover to a different 401-k from another company.

The PBGC – Pension Benefit Guaranty Corporation – guarantees that certain retirement benefits will be paid to employees or retirees in most plans, if the plan is terminated and not enough money s left to pay all of its promised benefits.

Check with your Human Resources or Benefits Department at your company, to find out what type of retirement plan your company offers, and which one you signed up for when you hired on. Then keep an eye on the accounts so you can make sure that the money will be there for your retirement.

If you are serious about enjoying retirement, you must begin planning for retirement now. The retirement plan should keep the following in mind.

First, make a review of your finances. You must know where you are as well as where you want to be and how you are going to get there. If deep in debt chances are you are not prepared for retirement. Your retirement plan must keep in mind that you will need 70% to 90% of your current income to maintain your present standard of living.

First think of what your retirement goals are. What does retirement mean to you? For some retirement is just sitting on the porch and watching the grandkids play. Their retirement plan will then be based on this factor. For some retirement means traveling to see the world. This involves considerable expenses. For some retirement comes somewhere in between these two extremes. Knowing what you want from retirement will give you an idea to make a retirement plan.

Live a healthy lifestyle now to enjoy retirement in the future. It may be the right time now to lose those extra pounds or to quit smoking. If you are not healthy and energetic when you retire, frugal spending and living habits won’t mean a thing. If your employer provides a retirement plan ask for an explanation of this plan. Find out if you can contribute something and if your employer provides matching funds.

Speak with your spouse about his/her retirement plan. See what benefits you might be entitled to receive. Thoroughly understand any consent forms or waivers you might be required to sign. The employer must regularly provide an individual benefit statement. This should show the amount that is owned by you. Thoroughly review this statement.

Opening an IRA might be a good idea. Almost all Americans can open an IRA if they have earned income. An IRA can be a Roth or a traditional IRA. Your bank can tell you how to open an IRA. Once opened contribute the maximum amount every year to the IRA.

Each year about 3 months before your birthday you should receive a social security statement. In making a retirement plan, review this each year.

If you are near retirement age, you will need to discuss retirement plans with your spouse. You might have different plans and need to make some sort of compromise. Your family must know your retirement plan as well as other long-term goals that affect them.

It is frustrating to have time and nothing to do with it. Think about what you want to do with your retirement. Whether you need life insurance or not in your retirement plan, it is a good idea to determine its benefits. This is true especially if your family would be left with huge debts or no source of income if you were to die.

See if you need long term care insurance. Though nobody likes to think about being with a major illness that can wipe out all savings, this is a possibility as you get older. So evaluate your need for long-term care insurance.

The above suggestions may not be able to prepare you for retirement fully. However, they are meant to help you make a retirement plan and retire peacefully.

The GMAC Retirement plan is the most commonly seen of retirement plans – the normal pension system. The GMAC retirement plan is also called a ‘defined benefit plan’. According to the terms of a defined benefit plan, when the employee reaches a specific age, he or she can retire and rest assured that whatever retirement benefits had been agreed upon will be paid every month after that.

The calculation of these benefits is usually based on a predetermined formula that usually uses the number of years the employee was a part of the company and in what all positions, and the position in which he or she retired – basically, the salary information. Once the person reaches the retirement age, he or she will be entitled to the benefits for as long as they live.

Benefits such as these, under the GMAC retirement plan, are usually called ‘accrued benefits’. Under the GMAC retirement plan, individual employees do not hold individual accounts. Another thing to keep in mind is that under such the GMAC retirement plan, the alternate payee is not given one sum at one time, as a lump sum. According to the terms of this plan, the alternate payee will be paid the benefit monthly, during the lifetime of either the alternate payee or the participant.

There are two approaches, generally, for a plan like the GMAC retirement plan. The first is the Shared Interest Approach. The main features of this approach are that the alternate payee never receives any sort of benefits until and unless the participant, that is, the employee, actually retires. Second, once the employee has chosen such an annuity with an ex-wife or ex-husband, is the employee marries again, the spouse could be left with no benefits.

The second approach in the GMAC retirement plan is the Separate Interest Approach. In this approach, the alternate payee can choose to start receiving the benefits he or she is entitled to as soon as the employee reaches the earliest possible retirement age. Basically, even in the unfortunate event of the employee’s death, there will be no difference to the benefits that the alternate payee already receives. The biggest advantage, of course, of this approach is that the alternate payee is not made to wait till retirement to receive any benefits. Second, unlike the other approach, the employee will not have to choose anything at any point that might affect his or her wife or husband in case the employee chooses to marry again.

Delaying Your 401K Withdrawal

Ideally one should not withdraw their 401K retirement money until it matures, there arises some situations when you need the money most, more so due to the lack of any other option. This makes it important for the contributor to know the 401K withdrawal rules, which are mentioned below.

- Withdrawing before you attain the age of 59 1/2 years entails taxation of the distribution amount in addition to 10 percent penalty tax. Further, the IRA also mentions some exceptions to this rule. The beneficiary receives the retirement amount in time of untimely death; if you become disables.

- You are eligible for retirement benefits if you terminate employment voluntarily on reaching 55 years old. Similarly, amount can be withdrawn for medical expenses or for ‘qualified domestic relations order’.

- 401K withdrawal rules imply losing further investment opportunities because of untimely withdrawal. Even if you withdraw a small amount, there is less chance to replenish the figure as there is a limit on annual contribution mentioned in 401K contribution rules.

- Withdrawal rules also states that one must withdraw in some situations like job loss or divorce.

It is because of the strict 401K withdrawal rules, one must consult professionals beforehand to understand the implications of tax deductions and future investment. Experts suggest taking loan against 401K if need be. Then one needs to repay within 5 years and further the time period shortens if you leave your current employment.

Further, it is not necessary to withdraw the retirement amount immediately after maturity. Annually you are required to withdraw the Required Minimum Distributions (otherwise, 50% penalty is charged according to the difference between the amount at disposal for distribution and the amount withdrawn) and delay the final withdrawal till the following year after reaching 701/2 years old. There are further 401K withdrawal rules, which a professional can make you understand intricately.

Retirement Risks

If you’re one of the “Baby Boomers,” you’re probably giving serious thought to retiring, if you haven’t already retired – and if you have already retired, you may be wondering if you’re going to be able to afford to stay retired.

Today’s economic crisis complicates the situation considerably by increasing the following retirement related risks:

1. Average Life Expectancy Has Increased

People are living longer than their parents’ generation. For example, in 1970 a 60 year old white male had a life expectancy of an additional 16.2 years; however, by 2008 his life expectancy had grown to 20 years.

So how is the Boomer going to afford retirement during those bonus 3.8 years? There are only a few likely answers to that question:

Increase current savings Work longer Move in with children or other family members Get by with a lower standard of living
2. Health Care Costs Keep Rising

Predicting and planning for ways to cover one’s health care costs are some of the most difficult, largely because requirements are so individualistic with requirements varying substantially from one person to another. Long-term care needs are even more difficult to predict and arrange adequate funding.

Health care costs have grown at a rate greater than 5% (inflation adjusted) for the past 15 years – and that is higher than the growth in family income. Medicare costs are expected to rise at a comparable rate.

3. Government Actions May Impact Retirement Benefits & Benefit Programs

It is well known that the costs associated with the major social programs (e.g., Social Security, Medicare, and Medicaid) are growing faster than other parts of the economy, and some experts question their long-term viability because of the combined effects of increased longevity, size of the Boomer population, and rising health care costs in general.

Further, immediate questions regarding ongoing health insurance in retirement, and at what benefit levels, are rampant in today’s economy – and these questions are given even more fuel by the reorganizations occurring, especially among the auto industry.

There is currently a lot of discussion about a national health care program – but such conversations have been ongoing for decades, with few benefits to show for those efforts. Although President Obama will be leading such efforts this year, most people expect a lot of opposition from Congress (although maybe it will be a bit easier now that the Senate will soon be welcoming its 60th Democratic Senator).

Most people expect that seniors over age 55 will be protected from cuts in these social programs, but maintaining full coverage for them is a two-edged sword – doing so increases the likelihood of a new value-added tax, which would likely add to the tax burden for retirees.

4. Sometimes One’s Retirement Date is Dictated, and not a Free Choice

According to a 2004 Health and Retirement Survey (HRS), 37% are forced to retire. This can occur due to poor health or economic downturns, etc.

5. 401Ks Became 201Ks

Did your 401k and other retirement savings take a major hit with the stock market meltdown last year? Mine did. Many people saw their 401k and other stock market accounts take a 50% hit, which has led many comedians to rename them “201k”. For many people, their 401k was the bulk of their retirement savings, so this stock market meltdown has really damaged their retirement plans.

Humpty Dumpty Had It Wrong

But, the news is not all bad. You can fix a broken egg – a broken retirement “Nest Egg,” that is. You can work longer, semi-retire and take a part-time job, work from home, start your own business, etc. A study by Butrica, Smith and Steuerle (2006) indicated that working just one (1) extra year can increase annual retirement income by 9%, while working a total of five (5) extra years results in an extra 56% annual retirement income.