An increasing number of retirees and pre-retirees are discovering that they have to continue working past their targeted retirement dates. The reason? They just don't have enough money saved to retire comfortably. Various circumstances can contribute to underfunded retirement accounts, including failing to begin saving early enough, making insufficient monetary contributions over the years and poor market performance of the investments selected. (For background reading, see Five Ways To Lose Your Nest Egg.)
One of the best ways to ensure that you are adequately prepared to retire is to take advantage of your employer's benefits program. Read on to find out what might be available and how it can help you save more for retirement.
Choose Your Job by Its Benefits Program
When looking for a job, people often focus on finding the job that pays the most. But, unless the difference in pay is significant, more pay does not always determine the best job offer. When considering a job offer, it is important to consider the entire package; this includes salary, medical and dental benefits, insurance coverage and the retirement plans under which an employee would be covered.
The Cafeteria Program
Choosing the employer with the better cafeteria plan benefits may mean fewer out-of-pocket expenses for medical and dental needs as well as better insurance protection for your dependents. Cafeteria plans include benefits such as:
- Flexible spending accounts (FSAs): FSAs can pay for a number of medical or dependent care expenses on a pretax basis. (See Healthcare FSAs Increase Your Personal Savings for information about FSAs.)
- Medical and dental benefits
- Assistance for dependent care and adoption
- Health savings accounts (HSAs): HSAs allow employees to pay for medical expenses on a pretax basis. (Learn about HSAs by reading Health-y Savings Accounts.)
- Term life insurance coverage
For employees, lower out-of-pocket expenses means more disposable funds - these can be added to your retirement nest egg, boosting your retirement savings. (For more insight, see Failing Health Could Drain Your Retirement Savings.)
The Retirement Program
The retirement plans program is an important part of your compensation package and could determine the lifestyle you can afford during your retirement years. When reviewing the retirement plans for potential employers, consider the following:
- Higher Salary Vs. Retirement Plan
An employer that does not offer a retirement plan might not be worth considering, unless the salary being offered is such that it will allow you to comfortably add contributions to your nest egg. These contributions should be comparable to those offered by other companies with a retirement plan. For instance: If potential employer A allows you to defer $16,500 to your 401(k) plan on a pretax basis and provides you with a matching contribution, while potential employer B does not offer a retirement program but offers a higher salary, consider whether the higher salary is such that it allows you to add $16,500 to your nest egg, plus any amount you would receive for matching contributions, profit-sharing contributions and the income tax that you would save through salary deferral. The results of your assessment should make the choice an easy one. (To learn more, read Retirement Planning: Building A Nest Egg.)
- Defined Contribution Vs. Defined Benefit Plan
If potential employer A offers a 401(k) plan and potential employer B offers a defined-benefit plan, employer B is often the better choice. With a defined-benefit plan, your plan benefits are not affected by market performance. Instead, investment risks are borne by your employer, and - unless your employer files for bankruptcy and is unable to fund the plan - your pension is guaranteed. Some may argue that by nature, defined-benefit plans are risky given the probability of the employer being unable to fund the plan. However, these plans are protected by the Pension Benefit Guaranty Corporation (PBGC), and while your benefits may be reduced, you are guaranteed to receive a minimum percentage of your promised benefits. (For more on this, seeThe Pension Benefit Guaranty Corporation Rescues Plans and Is Your Defined-Benefit Pension Plan Safe?) With a 401(k) plan, you accept responsibility for the investment risks and potential losses due to market fluctuations.
Choosing Between Two Defined-Contribution Plans
If you are trying to choose between two employers that offer defined-contribution plans, look for the following features:
Guaranteed Contributions: Money-purchase pension plans and target-benefit plans include guaranteed contribution features. As such, the employer is mandated to make contributions to the plan each year for as long as the plan is maintained or be subject to stiff penalties. Profit-sharing plans often include discretionary contribution features, which mean that the employer is not required to fund the plan each year. This makes the money-purchase and target-benefit plans more attractive than a profit-sharing plan. There are exceptions to this general rule, as an employer does have the option to include a mandatory contribution feature in its profit sharing.
Salary Deferral and Matching Contributions: If both plans include a salary deferral feature, check to see if there is a cap on the amount that can be deferred, other than the statutory limit. For instance, the employer may limit deferrals to 10% of compensation. If that is what you will be deferring anyway, it is not an issue, but if you would like to defer more than that amount, the plan may be too restrictive for your retirement needs. Check for matching contributions as well, to see which plan offers the higher matching contribution amount. (To learn more, read Making Salary Deferral Contributions – Part 1 and Part 2.)
- Choosing Between a Qualified Plan and an IRA-Based Plan
Qualified plans usually include distribution-restriction features that may force you to leave the funds untouched until you retire or change employers. This can be a good feature because it prevents the removal of funds from the nest egg for non-necessities. IRA-based plans, such as SEP IRAs and SIMPLE IRAs, have no distribution restrictions, which means that withdrawals from the fund are allowed. Other features, such as contribution limits and creditor protection, should be considered if you need to choose between the two.
If you are weighing two employers and neither one offers a retirement program, you can consider looking elsewhere, or determine whether the compensation package will allow you to fund your own retirement accounts, such as Traditional IRAs, Roth IRAs, tax-deferred annuities and other savings programs. (For more on choosing retirement plans, see Which Retirement Plan Is Best?)
A mistake that is often made by job hunters is to focus on salary, but bear in mind that your total compensation is not limited to your salary. Consideration must be given to benefits such as cafeteria and retirement benefits. If you want to get a good understanding of a potential employer's benefits package, ask for a copy of its summary plan description (SPD). SPDs are usually provided to current or former employees and beneficiaries; however, if this employer has a good package and you are an impressive candidate, the employer may be willing to make an exception on your behalf.