Will you have enough money to afford your current lifestyle once you retire?
There's a good chance that you and many other workers may not. Some people instead spend their retirement years struggling to make ends meet. What can you do to avoid that situation?
With a typical worker's retirement lasting as long as 20 to 30 years, making sure you have enough money for those years can be a difficult task. Consider the following:
A married couple earning between $50,000 and $100,000 can expect Social Security to replace only 16 percent of their income during the average retirement.
Few people stay at a company long enough (at least five years) to qualify for a traditional employer-paid pension plan.
Many people find it difficult to save more than 5 percent of their pre-tax income.
The good news is that 401(k) retirement plans can help you take control of your future and ensure a financially secure retirement. Typically, 401(k) plans-named for the section of the tax code that permits them-let employees contribute a percentage of their salary to a retirement plan. Taxes are deferred on both the amount contributed and the investment income. Often, the employer will match a portion of the employee's contribution.
According to Bruce Gordon, Vice President of Manulife Financial, one of North America's largest life insurance companies, the 401(k) is fast becoming the principal retirement vehicle for many employees. "By automatic payroll deduction, it offers a painless and convenient way to save for the future. A well-managed 401(k) plan can help a participant ensure a comfortable lifestyle in retirement."
There are several reasons for the 401(k)'s popularity among employees:
Many employers match the first 3 percent to 6 percent you contribute to the plan with a specified amount-it's like getting free money.
Most plans offer several investment funds to pick from and the ability to easily switch funds or change asset allocations.
Since you contribute to your 401(k) with pre-tax dollars, it reduces your income and you pay Uncle Sam less money.
Your 401(k) plan is portable. When you leave a company, the money you contributed plus everything it earned leaves with you.
The 401(k) plan, if invested in properly, can be your nest-egg builder for those golden years. Yet, 25 percent of those who are eligible to invest in their 401(k)s are not doing so. And of those who do contribute, 35 percent are not saving the maximum amount permitted under their plan.
How can you take full advantage of your 401(k)? Here are some tips:
If you haven't started contributing to your 401(k) already ...then start now!
Save the maximum amount allowable by your employer's plan.
Take some investment risks in the equities market to help you beat out inflation, especially if you are ten or more years away from retirement.
Resist raiding your account. When you leave a company, roll over the entire balance of your 401(k) into another tax-deferred savings plan.
If your company doesn't have a 401(k) plan, it's time to ask your employer to consider offering one. If you are self-employed, consider starting a Keogh, a plan that lets self-employed workers save for retirement on a tax-deferred basis, or a personal IRA.
Pick a plan that suits your personal needs. But remember, it's important to start saving for your golden years as soon as possible. Manulife Financial offers a free brochure on retirement planning. Just call 1-888-manulife.
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