Generation 42

Archive for the ‘Financial’ Category

The percentage and the amount you can contribute will vary from employer to employer. Regardless of the percentage your company allows, the maximum dollar amount the government generally allows is $9,500 per year for 401(k) plans and $6,000 for SIMPLEs, but this number is tied to inflation and allows incremental increases of $500 as the need arises. If inflation rises just 2 percent this year, that’s only a $190 increase ($9,500 x 2%) in your 401(k), for example, so the government will wait until that increase is at least $500 before raising the 401(k) contribution limit. If inflation stayed at 2 percent for three years, the government would raise the limit after those three years. The same theory applies to the SIMPLE contribution limit.
In addition, with a 401(k) the government has interesting regulations that affect how much you can contribute if you are making a lot, $80,000 or more. (This figure also changes for inflation.) When you earn this kind of money, the government considers you to be a “highly compensated employee,” and out of fairness to all employees they do not want the average percentage for those earning $80,000 or more and putting the maximum into the plan to be far greater than the average percentage of all other employees who are not as highly compensated. A plan where the higher-paid individuals contribute much more than the lower-paid is called “top-heavy.”
This means that if you are highly compensated in the government’s eyes, you might not even be able to contribute the full $9,500 to your 401(k). In fact, if employees at your company who are less well paid are not putting in anything at all, you may not be eligible to contribute anything whatsoever. Make sure your plan administrator has addressed this potential problem. Otherwise, if you are highly compensated and have put too much in your plan, they’ll have to give the money back to you, and it will be taxed as ordinary income. One advantage of a SIMPLE is that it’s not subject to these rules, so even if lower paid employees are not putting in a penny, you can still put in up to $6,000 if you want to, which you surely will.

You need not feel afraid about increasing your contributions to the maximum. None of these changes is cast in stone, and you could always change back if you felt you had to. Among all the people I’ve had do this, by the way, not one single person has ever regretted it—or changed his or her contribution back to where it was. You cannot afford not to try this out. There will be a day, you know, when you won’t be able to bring in a paycheck, and you must prepare for that day now.
Companies are offering 401(k) plans because most of them do not offer pensions anymore. When many of our parents retired, things were different. Back then, almost everyone received a monthly paycheck from their longtime employers after retirement_that’s why retired people were called pensioners. Also, even a generation ago people were not living to ripe old ages, the way we are now, and retirement was a shorter- term eventuality. For most of us, the pension check is a relic of the past.
If you’re counting on Social Security to see you through retirement, count again. That is not the most secure bet you could make. When Social Security was first created, the average life expectancy was sixty-two. The architects of Social Security expected that very few Americans would live long enough to collect it. Surprise! Now that the average life expectancy extends well into the eighties, most of us will spend more years in retirement than we ever did working. This is placing a tremendous strain on the Social Security system, and it’s quite possible—no matter what the politicians say now—that by the time you retire, Social Security benefits will have been reduced, if Social Security still exists at all. You, your money, and what you do with it today will be the only thing you can count on for your future. Since no one is doing it for you, you have got to do it for yourself. For most of the people who come to see me when it’s time to retire, the saving grace is their 401(k) or other retirement plan. Almost certainly it will be for you, too.

“I would happily up my 401(k) to the maximum,” Judy said, “but I can’t afford it.”
It was actually quite a few years ago when my mom died and left me what I thought was a nice inheritance. At the time, I had just a few credit card bills—not more than, say, $2,000. But I sure loved having more money in the bank. My partner and I had been living together then for about eighteen years, and we had always had a nice sharing relationship financially. But things seemed to change after I got that money. Before I knew it, I had spent more than half of it, on things I had never really given much thought to before. And Deb, well, she started to spend more, too. Before I knew it, our credit card bills were up to around $7,000. And that was before we bought our new apartment. But now I’m getting nervous about the future. I have a 401(k) plan at work, and I put in 6 percent, which is what the company matches. Deb doesn’t even have a retirement plan at work. I probably should put more money away for retirement, I know it makes sense, but I really can’t afford to, not with the mortgage and everything.
Judy had it backward. In fact, she couldn’t afford not to put more money away for retirement. Having worked at the same corporation for twenty-seven years, she had missed out on thousands upon thousands of dollars she could have saved painlessly, effortlessly, and tax-deferred. By receiving a little less in each paycheck, she would have earned herself far, far more in the long term for her retirement, which would be upon her not too many years down the road.

There are only three honest ways in this life to get money. The first is to work for it. The amount of time most of us are able to work will be limited—by age, health, elimination of our jobs, whatever—and there will be many years, for most of us, when we’re spending money but not earning it. Do you know that most of us will spend more time in retirement than we ever did working?
The second way to make money is to inherit it. Are you among those who are hoping that an inheritance will be your saving grace? If you’re waiting around for the heavens to rain money down on you, I hope you paid close attention With the life expectancy inching up to the eighties and beyond, you might well hit your own retirement years before you ever see a penny. What is more, for the majority of us, inheritance is rarely a sure bet. One nursing home stay, a few investments gone bad, a large probate or estate tax bill—anything can happen.
The third way to make money is the most powerful and respectful way there is. This is to invest the money you save during your working years wisely, so that when you no longer want to or are able to work, your money will work for you. The earning years of your retirement money can go on forever— money is a living entity, remember? If invested with respect, if invested in time to let it grow, these earnings will take care of you well and go on to take care of those you leave behind.