Retiring Well: How to Plan for Your Financial Future
A retirement plan. You know you need one, but the options can be overwhelming and confusing. Here are some tips to help get you going, whether you’re looking out for your financial future, your employees’, or both.
Start by assessing your specific goals and limitations. What do you want to accomplish personally? And what can you afford in terms of money and manpower? Once you know what your own needs and parameters are in relation to retirement, you’ll be able to determine what, if anything, you can offer your employees. Given the number and type of retirement plans available [see information below], though, you’ll probably find that the costs of establishing and administering a plan are less than you think.
Joyce Morningstar, senior wealth manager at Dynamic Wealth Advisors in Scottsdale, Ariz., suggests these steps for moving forward.
• Research your options. The websites of the Internal Revenue Service and the Department of Labor’s Employee Benefits Security Administration are helpful in answering common questions as well as in providing links to publications such as “Taking the Mystery Out of Retirement Planning” (http://1.usa.gov/1m0uuNd) and “Choosing a Retirement Solution for Your Small Business” (http://1.usa.gov/1f3QpPy).
• Define your personal and business goals; make sure they’re compatible with plans you’re considering. Then narrow the options by asking yourself: How consistent is company profitability? How much can I afford? Does the plan that works for my employees also work for me or do I need a separate plan? What manpower and tools are necessary to manage the plan? Who will be eligible?
• Consult a qualified expert to help you select the best plan as well as explain your ongoing responsibilities and how the plan will operate.
In the end, Morningstar says to select a plan that allows you to make meaningful contributions and protects money from creditors and/or business failure.
After enacting a plan, “reassess every two to four years to ensure the plan still matches the needs of your business and participants,” she adds. S
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Common Retirement Plans
• Traditional IRA (individual retirement account) is similar to a savings account. You deposit pretax earnings into an account (at a bank or through another investment entity such as Fidelity, Schwab or Edward Jones) and earn tax-deferred interest and dividends. Investment options include stocks, bonds, certificates of deposit and annuities.
• One-participant, or solo, 401(k) is like other 401(k) plans but covers a business owner who has no other employees. Because the participant is both owner and employee, contributions to the plan can be made in both capacities; 401(k)s have the same investment options as IRAs.
• Keogh plans are tax-deferred pension plans available primarily for self-employed individuals (although unincorporated businesses are eligible), with the same investment options as with a 401(k) and IRA. Keoghs are ideal for individuals who want to make larger contributions than either an IRA or 401(k) allows.
• 401(k) allows employees to make pretax contributions; matching employer contributions are allowed but not mandatory. “A 401(k) plan can work well for companies with total plan assets of at least $1 million to $2 million,” says investment specialist Joyce Morningstar.
• SIMPLE (Savings Incentive Match Plan for Employees of small employers) IRA is similar to a 401(k) in that employees can contribute. Key difference: Employers are required to make certain matching contributions. Typically used by employers with 100 or fewer employees.
• SEP-IRA is funded entirely by employer contributions; available to almost any employer as well as the self-employed. “SEP and SIMPLE IRAs work well as startup plans or for companies with 10 to 20 employees with modest incomes,” Morningstar says. “They are inexpensive and simple to operate.” Another plus for the SEP-IRA: It can be terminated at any time if you outgrow the plan. The downside is that contributions are more limited than with a 401(k).
• Defined benefit (DB) plan is a type of pension plan that guarantees to pay participants a fixed amount when they retire. These employer-funded plans are expensive but are aimed at maximizing savings. “A company with a small number of employees may be a good candidate for a group-defined plan,” Morningstar says. “An example would be a company with a limited group of older, highly compensated owners or key employees.”
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