While many retirement plans have unusual names such as 401K, 403B, or SEP (Simplified Retirement Pension), they all have one thing in common. Placing money in the plans early in your career can help lead to a more financially stable retirement.

“The long term benefit is that you increase your likelihood of having a comfortable retirement,” said Kevin Healey, vice president and chief human resources officer for Kennebec Savings Bank and former vice president of human resources at St. Mary’s Health System, one of the area’s largest employers.

“Social Security is under extreme financial pressure and many experts forecast shrinkage of future benefits because those drawing the benefit will surge with the retirement of the baby boom generation and there will not be enough workers paying in to the system to fully fund all retirement benefits,” said Healey. “Money in a retirement account is your money. It may increase or decrease based upon the investment decisions one makes but it is not dependent on government or company funding. Once the money is vested and in your account, it is yours. The more that goes in to your account, the better your retirement options.”

Jerry Marstaller, SPHR, benefits and compensation manager at Central Maine Healthcare agreed that retirement plans are ideal ways to establish additional sources of retirement income.

“The benefit is the growing and compounding that occurs over time,” said Marstaller. “When first starting, it seems to take a long time to get the first $1,000 in the account. Then, the second $1,000 happens quicker and eventually somebody’s account breaks $5,000, then $10,000. It snowballs in a very good way.”

Marstaller noted that with contributions to these plans coming out before federal and state taxes, the result is that it costs only about $80 to contribute $100 to the plan.

“Most of these plans are also portable,” said Marstaller. “When leaving one company it is very common that a person can roll the old plan into a new plan. If the new employer doesn’t offer a retirement option, the former plan can be rolled to an IRA (Individual Retirement Account).”

Healey explained that in today’s workplace, there are often matching plans for retirement funds in which the employer matches contributions made by the employee. If an employer offers a match formula, the employee will want to put enough of their own money into the retirement account to get the full matching dollars available.

“If an employer matches your contribution dollar for dollar on some percentage of your income that you put into the plan then you have an immediate 100 percent return on your investment,” said Healey. “If you don’t take advantage of an employer match program then you are turning down money that is available for your future retirement.”

Healey cited an example in which if a person makes $30,000 per year and the employer matches the first 3 percent of income that is placed in the account, then the person gains $1,800 for retirement (3 percent of $30,000 is $900. When the person contributes this amount, then the employer also contributes $900 for a total of $1,800).

“The employer match is free money,” said Marstaller. “The match is like doubling money every paycheck.”

Since the money in retirement accounts is owned by the employees, they also have the freedom to choose where the money is invested. Choices often range from very conservative options with low risk and lower returns to mutual funds that represent various stock and bond funds, some with riskier and possibly higher returns. Each employer usually offers a limited selection of investment choices that the employee can change at any time, usually by accessing online retirement sites.

Perhaps the most troubling news from Healey and Marstaller is that many employees are not contributing the minimum amount to earn employer matching dollars. The human resources industry often estimates that as many as 40 percent of employees are not contributing at the threshold to receive the free money match.

“What I most often hear is that many household budgets are tight and that they can’t afford to invest for retirement. I also think it often comes down to priorities,” said Healey. “The new smart phone or the flat screen TV can be enjoyed today. Putting money into a retirement fund for your needs in later life seems like a long way off, especially for young people.”

Marstaller suggested that if a budget is tight to pay bills and living expenses, then a person should start off with small investments.

“For those employees, maybe they start with a simple 1 percent contribution and increase that every six or 12 months,” said Marstallar, who has been employed at Central Maine Healthcare for 34 years. “The easiest way to increase a deduction is to time it with a pay raise. If an employee is receiving a 2 percent pay raise, he or she could increase the retirement deduction by 1 percent and still have more take-home in the next paycheck.”

For further information on retirement plans:

Internal Revenue Services: www.irs.gov/Retirement-Plans/Plan-Sponsor/Types-of-Retirement-Plans-1

Forbes Magazine Retirement Guide: www.forbes.com/special-report/2013/retirement-guide.html

AARP Retirement Planning : http://www.aarp.org/work/retirement-planning/


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