OK, I'll confess. I’d rather retire early if I can.
Bearing that in mind, I think you can guess my general reaction after recently reading that our Social Security program is still in bad shape. By “bad shape,” I mean that the most recent Social Security Bulletin projects that by 2033, the Social Security trust fund will be unable to “fulfill its obligations.” The same projection last year predicted 2036 as Social Security’s date of insolvency.
Have I mentioned that I’m one of the last of the baby boomers? In 2033, I expect to be alive and hopefully retired, depending in part upon Social Security to meet my financial needs. Looks like I, and others similarly situated, need to contemplate that our dependency upon Social Security might not be so secure.
So what should I, and others similarly situated, do?
For those of us who are currently employed, the answer may be as easy as learning more about our employer’s retirement plan(s), including several tax breaks Uncle Sam affords. By learning more about our retirement plan(s), we can better plan and prepare for our future.
I think now is a good time for employers and others in the benefits community to educate/re-educate employees about how to take full advantage of their employer’s retirement plan – specifically a 401(k) plan - including certain associated tax breaks.
For employees, the recent news about Social Security, along with the fact that most of us recently filed our 2011 income tax return, results in our being especially receptive to learning about how to save for retirement and to save on taxes.
For employers, plan advisors, and plan service providers, it is likely that the 2011 ADP test has been completed. If the ADP test results were “bad” (meaning that the test didn’t initially pass), educating employees about saving under a 401(k) plan can favorably impact the 2012 and future years' ADP test – which will generally make the employer (and especially certain of its highly compensated employees) happy. Another reason why the timing for education is good? This year’s required disclosures include ERISA's 408(b)(2) and 404(a) disclosures.
(See some valuable educational tips on the next page)
As an employer or plan advisor/service provider, following are some educational tips you can highlight for employees covered by a 401(k) plan:
- Maximize pre-tax deferrals; save now, accumulate earnings, and defer payment of taxes until at/after retirement. Remind employees of the maximum amount they may defer under the plan (e.g. up to $17,000) and how easy it is to start making deferrals.
- Consider making Roth 401(k) contributions (if the plan has this option). Remind employees that, depending upon their situation (such as their current tax bracket), making after-tax contributions makes sense (paying the income tax now), because all of the earnings, when withdrawn, will be tax-free. If the plan has this option, remind employees that the maximum deferral limit of $17,000 (referenced above) includes pre-tax and after-tax deferrals.
- Consider increasing deferrals for a special event, such as for payment of a bonus or large commission. Deferring a higher amount from just that one paycheck can result in tax savings that might otherwise be forever lost (i.e. paid to Uncle Sam).
- Make the maximum “catch-up contributions” (for employees at least age 50, if the plan has this option). For 2012, one may defer up to $5,500 as “catch-up contributions” (in addition to the $17,000 deferral limit cited earlier).
- Get free money! If your plan matches employee deferrals, remind employees of this great benefit. Remind them of the formula and how to get the maximum match. Talk about employee appreciation for their employer!
- Saving on a steady basis over time can result in a huge account balance. Remind – or better yet – show employees an example of how saving on a steady basis, coupled with the beauty of the compounding of interest and the accumulation of tax-deferred savings until a later date, can result in a dramatically “big” account value.
- “Play” on the employer’s or plan-provider’s website (where this applies). By playing, employees gain an appreciation for, and educate themselves, on how saving and investing can help make their retirement more financially feasible and secure. Examples of what I mean by “playing:” Encourage employees to access the website’s retirement planning features, such as:
- (1) how much to save now to result in a specified amount in the future (using an assumed interest rate),
- (2) how to choose an investment strategy and/or portfolio, and
- (3) how different investment “mixes” can produce dramatically different results. This might also lead to a nice segue about the ERISA 404(a) disclosures.
- Remind employees about the IRS’s Saver’s Credit (for low-to-middle income taxpayers), which can result in a tax credit of up to $1,000 for a single-filer, and up to $2,000 for married couples. Who doesn’t love free money?
Even if Social Security isn’t healthy, I realize that I have time to take full advantage of my employer’s 401(k) plan and better plan for my retirement. And yes, I do plan on retiring . . . and not as late as possible . . .