Time To Start Thinking about Retirement

A few days ago my job called in some reps from the company that handles our 401k plans to give a presentation about our benefits. I am glad that I actually attended this meeting as opposed to skipping out on it like I wanted to. It was very interesting to hear the thoughts and concerns of the various age groups that were present at the presentation. While there were many different views on retirement, everyone agreed on the fact that retirement is something that needs to be meticulously planned out. I can honestly say that retirement planning has not been something at the forefront of my mind, at least in terms of utilizing a 401K or some similar financial instrument as the sole actor in my retirement strategy. Especially due to the current economic climate I have really been wondering what I should do with my money and how I should save for my retirement. At my first job I did contribute to my 401K a little, but I have not begun to contribute at new job.

At the presentation, the rep spoke rather convincingly about the importance of starting retirement planning very early; a lot of people said things like max out when you’re young, other people inquired about different forms of managed financial retirement packages. We went over two forms of retirement packages. The first one, the one we have at my job, was the 401K; the other was the Roth 401K. The main difference between the two is how they are taxed. The 401K contributions are taxed when they are withdrawn at retirement, meaning your current contributions are deducted from your pre-tax (gross) income; when you retire you pay taxes on the checks that you receive at the same rate you would if they were income. On the other hand, the Roth 401K contributions are made from your post tax (net) income; when Roth funds are paid out at retirement they are not taxed, because they were taxed in your pre-retirement years.

Now you might be wondering, like I was, what’s the difference, you’re going to get taxed either way so why does it matter which one you choose? I think this rep gave me the best explanation for what you should base your decision on regarding these two retirement options. The rep said if you plan to be in a higher tax bracket when you retire use the Roth. You would want to use the Roth in this case, because if you pay taxes on the money early in your career, the tax rate will be lower than it will be in your retirement, if everything goes according to your plan. Now, if you plan to be in the same or a lower tax bracket when you retire you should use the regular 401K because you will be possibly be taxed at a lower rate, since you will be in the same or lower tax rate in retirement that you are in currently. The gist of his explanation is that you want to choose the option that will allow you to pay the lowest tax rate, whether your lowest tax rate is your current tax rate or future (retirement-age) tax rate depends on you and how manage your finances and career.

Now I think both the Roth and regular 401K plans are great, and should be utilized in your financial planning arsenal. I am partial to the Roth option, because I like to think that I will be in a higher tax bracket later in my life, at least that is my goal. The rep definitely tried to use the current economic climate to argue for these retirement products. He argued that since the market is at such a low, you should put more in now so that when the market returns you will be in a good position to benefit from the rise. This argument is great, but I feel that the problem is that if one relies on only these products for retirement income you will be dependent on the financial analyst that manage these funds. Given all of the current financial scandals do you really feel comfortable trusting these people with your entire retirement income?

I have been fortunate to have close relationships with different people in my family that are at various stages in retirement. One can learn a lot about retirement by observing other people’s triumphs and tribulations. I have one family member that retired early, the payments from her retirement package have decreased, because the total value of her package has decreased due to current market conditions; and this is one of her sole sources of retirement income; thus the decrease in dividends is having a pretty bad effect on her financial stability. Another family member, on the other hand, who came of age during the depression, is probably one of the most well off retired people I know.

This family member has a traditional pension, in addition to his pension, he has a traditional investment based retirement package, much like a 401K, this has decreased in value do to the current market conditions. He also receives social security, since he is over 65. In addition to everything I just mentioned he owns his house, which has a 2 bedroom apt on the first floor, and he has 2 other apartment buildings. He invested in this property when he was in his 30s. He also made sure that his house could generate rental income, which allowed him to pay off that house quickly. One thing I love about his retirement strategy is that it is not just backed by stocks or a pension; but a REAL asset, his apartment buildings, also backs it. I once asked him, what made him buy the buildings, he replied companies come and go, stocks go up and down; people will always need someplace to live. In this current economy he has lost about 200K in value from his 401K, I have only heard him talk about that once. One would think he would complain a lot about a loss that large, or at least talk about it more; but he doesn’t, because he has multiple streams of income in his retirement.

When I think about my retirement, there are numerous things I have to think about and accept. One, I have to accept the fact that pensions are a thing of the past; therefore I am not guaranteed that my employer is going to pay me a fixed amount of money for the rest of my life once I reach a certain age. Two, there is an extremely high probability that I may not get social security payments. With the current financial state of the government, and the huge influx of baby boomers that are about to be drawing Social Security benefits, I don’t think it is that far fetched that I am worried about getting my Social Security. Three, while it is true that over the course of history stocks have tended to rise; I don’t want to depend on just that. Look at all the people that are at retirement age right now, their stock backed retirement funds have taken tremendous hits; there are even some retirement funds that have gone bankrupt or had to halt withdrawals.

After the great presentation we received at work, it just made me think more and more, that the only true safe bet when it comes to retirement is to have multiple streams of income all throughout your life and in retirement, that way, if one fails, you may be lucky enough to have another stream pick up the slack. I am by no means advocating not using a 401(K) or some similar plan; I think that would be just ludicrous not to make use of these options. I just feel like these types of plans are some of the tools that one should utilize when composing a retirement strategy, but they are not the only tools. A construction worker does not only use one tool to build a house, why does our society promote the use of one tool when building our retirement income.

for more information on some of the packages I have talked about take a look at this great wikipedia chart that breaks down some of the popular retirement options here.