This should have been a May post (finance was the month's focus), but I just signed the papers yesterday, and I couldn't be happier!!!!
Like an idiot, I emptied out my 401k when I moved to Europe in 2007. I always thought that somehow I'd make enough money to put aside, invest, and work towards building up my next egg.
So when I moved to Canada and found out that my employer contributed 10% of my salary to my retirement plan, I was STOKED to start one! Trouble was, I couldn't. After going from bank to endless bank, even getting letters from the Canada Revenue Agency to validate my residency status, I was not permitted to have an RRSP (Registered Retirement Savings Plan) until I filed my taxes and received the RRSP contribution limit for 2010.
It's been a full year of no retirement plan, but FINALLY, it's in place! I am so excited to have this taken care of. I'm almost grown!!!
In case you might be interested, here are a few tips from The Boston Globe's Personal Finance Section on building a solid retirement plan:
- Know the role of the retirement savings plan. Once retired, your income will come from several possible sources: Social Security retirement benefits, pensions, employer retirement savings plans like the 401(k), personal savings and/or part time work.
The value of your employer based savings plans, like the 401(k), 403(b) or 457 plans, will be an important source of that income. The more you save, the more that will be available for you to use during retirement.
- Participate in your employer plan - Payroll deduction is the first and one of the most powerful advantages of a 401(k) plan. Money is saved automatically into the plan before federal and often state income taxes are withheld. This means that a dollar contributed to the plan results in a decrease in take home pay of only around 70 to 80 cents.
Regular and disciplined savings is the first advantage of these plans.Tax breaks are the second.
- Your account grows deferred - Unlike regular investment and bank accounts, you do not pay taxes on any dividends or interest that occur inside your retirement plan. You also don’t pay taxes when you sell one investment and transfer to another. This tax sheltered growth allows more of your money to stay invested rather than going to taxes.Taxes aren’t paid until you withdraw money from the accounts to spend.
- Save as much as you can - The more you save, the more you have. This savings may make up a significant part of our retirement income. More is better.
- Increase your contributions annually - An effective strategy to increasing your retirement plan balance is to increase your contributions periodically; perhaps once each year or when salary increases occur. This can create a significant increase in your potential balance at retirement.
- Maximize the match - If your employer offers matching contributions, be sure to contribute at least enough to get all of the match money offered. This is literally as close to “free money” as you are ever going to see in this lifetime. So, make sure you get all that’s offered to you.
If your company has suspended or dropped the match, don’t stop contributing. It’s conceivable that the company could re-instate the suspended match retroactively for the year, matching whatever contributions you made during the year. By not contributing, you could miss out on that free money.
The Match is only the third or fourth advantage of saving into the plan. The others are still valid and more important. Remember, what is paramount is that you are saving and that you receive the income tax advantages.
- Have an investment strategy, not a bet - Your retirement plan assets can be invested in very conservative investment options. Most plans offer a Stable Value or Fixed Interest rate account. However, a potentially higher return often requires assuming degree of risk to a degree. Therefore you may want to consider investment options that invest in bonds and stocks.
If you choose this path, mix up stocks, bonds and cash in a manner that fits your risk tolerance. Your plan will usually offer some help in this area. Don’t pick your funds simply by what they did in the past.
- Review and re-balance - Periodically, either every six months or once a year, review your account and see if the mix of investments is still in balance. If not, remix the account to the original allocation that you had chosen.
- Know the rules on getting your money out - Most 401(k) plans have withdrawal rules that differ from employer to employer. Find out what you choices will be when you leave the company or retire.
Federal law allows you to keep you money in the plan as long as your balance is greater than $5,000. Some plans allow you to take withdrawals or roll a portion of the account over to another plan or IRA. Most plans seem to require either taking or rolling over all of the assets from your plan account rather than a select amount. In other words, take all or none. Plans of large companies often offer a very inexpensive choice of investment options that you may want to continue using.
- Have confidence - Don’t lose confidence in your retirement plan. Values have decreased with recent declines in both the stock and bond markets. Remember, however, that you still own the same number of shares.
Long term investors know that market declines and advances have been part of the investment experience for decades. Don’t stop contributing. You still need to save money. Remember, you are buying shares at much lower prices than last year.