Missed Opportunity
Invest in Your Employer-Sponsored Plan
Are you immune to this classic sales pitch – Don’t miss this once-in-a-lifetime opportunity! What if there really was a fantastic opportunity you shouldn’t miss? Investing in your employer sponsored retirement plan is definitely one of those times.
Excuses, excuses, excuses
People have countless excuses to put off investing for their retirement. "I can’t afford it," "I’m too young," "I don’t understand investing." When you put these – and other excuses – to the test though, are any of them really valid? The answer is no. The truth is, it’s always a good idea to take advantage of your employer-sponsored retirement plan.
Pay yourself to save
One of the biggest benefits of investing in your employer-sponsored plan is that your contributions reduce part of your salary on which you pay taxes. Here’s how: If you’re in the 28 percent tax bracket, and you invest $5,000 a year, that’s $5,000 of your salary on which you’re not paying taxes this year; so you reduce your annual tax bill by $1,400 ($5,000 x .28). It’s like you’re paying yourself first to save for retirement.
And once you’ve decided to invest, doing so with an employer-sponsored plan actually may keep more money in your pocket today. Consider the chart below showing the difference between investing with a plan versus investing outside a plan.
Stan makes $40,000 a year and decides to put aside 6% of his biweekly salary for the future.
If he contributes to a plan: | If he saves outside a plan: | |
|---|---|---|
His biweekly paycheck | $1,539 | $1,539 |
6% of his biweekly pay contributed to the plan | -$92 | N/A |
His new taxable income | $1,447 | $1,539 |
Federal income taxes | -$405 | $-431 |
Take-home pay | $1,042 | $1,108 |
Money saved outside the plan | N/A | -$92 |
Money left in his pocket | $1,042 | $1,016 |
Note: This hypothetical illustration assumes a biweekly savings of $92 or six percent of pay equal to $2,400 per year and a federal tax rate of 28 percent and is for demonstration purposes only. It is not intended to (1) serve as financial advice or as a primary basis for your investment decisions and (2) imply the performance of any specific security. Before-tax contributions into tax-deferred investments are subject to Internal Revenue Code limits. Taxes are generally due upon withdrawal and early withdrawal penalties may apply to withdrawals taken before age 59½. Your employer may offer you a choice among retirement accounts qualifying for tax deferral. Your local ING representative can explain the benefits, features and costs of each. You should consult with an advisor when you consider your alternatives or make tax-related decisions. Legal and tax advice are not offered by ING and its representatives.
Youth is on your side
If you think you’re too young to start planning for your retirement, just the opposite is true. The younger you are, the better. By investing early in your career, you’ll enjoy the potential benefits of tax-deferred growth and compounding of interest for decades. Compounding is a multiplier effect. Consider Larry and Susan:
Larry | Susan | |
|---|---|---|
Age at which savings started | 45 | 25 |
Monthly contribution | $300 | $100 |
Total contribution by age 65 | $72,000 | $48,000 |
Total pre-tax savings at age 65 | $171,798 | $324,180 |
Note: This hypothetical illustration assumes each account earns an annual rate of return of 8 percent and is for demonstration purposes only. It is not based on the rate of return of any particular investment and does not include costs incurred under particular investment. It is also not intended to serve as financial advice or as a primary basis for our investment decisions. Dollar cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. Taxes are generally due upon withdrawal.
Susan not only ends up with more money than Larry, but she also contributed significantly less money than him. This is one of the benefits of starting early.
Pension and Social Security are not what they used to be
You might be thinking, "Why do I need to save so much? Isn’t that what Social Security is for?" Not necessarily. In recent years, this traditional source of retirement income has become a smaller part of the equation. Consider that for the average worker, Social Security replaces only about 40 percent of pre-retirement income.1 For the next generation of retirees, these percentages may be even lower. That leaves you responsible for more than half of your own future income. That’s why participating in your company’s retirement savings plan may be more important than ever to ensure the future of your dreams.
It’s never too late to start
If you’re nearing retirement and still haven’t taken advantage of your company’s plan, you probably believe it’s too late. But every little bit helps. While you may miss the long-term advantages of a younger investor, you’ll still get the current income tax benefits. Plus, your investment’s earnings will also be exempt from current income taxes. That’s a significant advantage over many other kinds of investments, whose earnings may be reduced each year by taxes.
If possible, consider investing the maximum amount allowable. You may even be able to take advantage of "catch-up" provisions to increase your contributions even more. A few years of investing could put you ahead of where you’d be if you’d done no investing at all.
Borrow money from yourself
If you’re concerned about locking up money that you may need to access in an emergency, keep in mind that many plans allow you to take a loan from your account and then pay yourself back out of your ongoing contributions. Note: loans will reduce your account balance.
No expertise required
So you don’t understand stocks, bonds, mutual funds, asset classes and all the other seemingly complicated terminology that comes with investing? Guess what? You don’t have to. Your company’s plan may have easy-to-understand educational materials. Plus, software, worksheets and calculators will help you clarify your investment goals – based on your own life situation.
Saving made painless
By using automatic payroll deduction, contributions are automatically deducted from your paycheck – before you have a chance to spend them.
What’s your excuse?
Why would you not invest in your employer-sponsored retirement plan? Contact your local ING representative to learn more about this great opportunity.
1 Social Security Administration, SSA Publication No. 05-10035, January 2007, ICN 457500, www.ssa.gov/pubs/10035.html#plans
Insurance products, annuities and funding agreements issued by ING Life Insurance and Annuity Company (“ILIAC”), One Orange Way, Windsor, CT 06095, or annuity products are issued by ReliaStar Life Insurance Company, each of which is solely responsible for meeting its obligations. Plan administrative services provided by ILIAC or ING Institutional Plan Services, LLC. All companies are members of the ING U.S. family of companies. Securities distributed by or offered through ING Financial Advisers, LLC (member SIPC) or other broker-dealers with which it has a selling agreement. Only ILIAC is admitted and its products offered in the State of New York.
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