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Synopsis:
Discover how to get the most out of a 401k, measure services, fees and fund performance, and how to use it as the basis of a growing portfolio to reach long term financial goals.
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Jacket Description:
Vesting refers to the time when you have ownership of the money in your retirement plan. When you are vested, benefits must be paid to you, even if you leave the company years before your retirement. If you quit your job or are terminated before becoming vested, however, you can't collect any of the money set aside in your retirement fund. If you return to a former employer after a "break in service" or working somewhere else, you must be given credit for your prior service.
Many employers see vesting as a way to reward loyal employees for sticking with the company and as a way to keep employees on board. But under traditional defined benefit pensions, vesting by itself did not mean much in the way of benefits. Even an employee who worked 10 years for a company-say from age 22 to age 32-might have very little in the way of vested benefits, certainly not enough to turn down a good career opportunity.
The money you put in your 401(k) plan is vested immediately. Whenever you leave your employer, you have the right to take that money with you. But the money that your employer contributes-the company match or profit-sharing dollars-is a different category, controlled by the employer.
Your employer may provide immediate vesting on that money, too. But more likely, there is a vesting schedule that lays out how long you must work in order to get this money. Employers may provide vesting in one year or two years. But they are not permitted to establish vesting schedules that go beyond the maximums set forth in section 411 of the Internal Revenue Code. These guidelines permit two choices: five-year "cliff" vesting or three- to seven-year "graded" vesting.
Under cliff vesting, the employee is not vested in any of the employer contributions until he completes five years of service. Then he "falls off the cliff." He is immediately 100 percent vested in all employer contributions. If he leaves after that point, the money belongs to him. Under graded vesting, the employee becomes vested in 20 percent of employer contributions after three years, 40 percent after four years, 60 percent after five years, 80 percent after six years, and 100 percent in seven years.
It is probably not worth your while to stick with an employer to become vested in a traditional pension, particularly if you are young. Benefits in these pensions are heavily weighted toward older, higher-paid employees. If you've been working only five years, you may have earned a few hundred dollars to be paid 40-some years from now.
But with your 401(k) plan, it is quite easy to see what you gain by waiting until you're vested in the plan. For instance, suppose your employer matches 50 cents on the dollar of your contribution up to 6 percent of your salary. You earn $50,000 and contribute the 6 percent, or $3,000 per year. Your employer contributes $1,500 each year. After four years, your employer's contribution totals $6,000 plus the earnings on that money. If your employer provides for five-year vesting and you leave after four years, you leave that $6,000 on the table.
That shouldn't be enough money to persuade you to give up a great career move. But it's certainly enough to pay attention to. One of the great benefits of 401(k) plans is that they are portable. Even if you work for half a dozen different employers, you can still earn the same benefit that you might have earned working for just one. Check your company's vesting schedule and keep it in mind when planning your career.
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Table of Contents:
INTRODUCTION I
PART I
The Retiremert Landscape 26
STEP 1 Think about how retirement is changing
STEP 2 Focus on what you do well
STEP 3 Set up your own shop
STEP 4 Calculate retirement needs
STEP 5 Refine your projections
STEP 6 Consider what you're likely to get from a
pension
STEP 7 Don't bank on Social Security
STEP 8 Check your Social Security earnings and
benefits
STEP 9 Take a look at taxes
STEP 10 Consider the power of compounding
STEP 11 Start early
STEP 12 Compare a 401 (k) to an IRA
STEP 13 Take a look at the new Roth IRA
STEP 14 Contribute, contribute
STEP 15 Buy disability insurance
P A R T 2
401(k) Plans: The Basics 62
STEP 16 Look at the players
STEP 17 Consider your employer's agenda
STEP 18 Consider the government's agenda
STEP 19 Turn this to your advantage
STEP 20 Look at the contribution limits
STEP 21 Pay attention to vesting
STEP 22 Consider the qualifying rules
STEP 23 Check the hardship withdrawal rules
STEP 24 Read the summary plan description
STEP 25 Check into plan safety
P A R T 3
How to Get ln and Get Out 88
STEP 26 Get help from Human Resources
STEP 27 Check the employer match
STEP 28 Check out loan provisions
STEP 29 Pay attention to beneficiary designation
STEP 30 Watch out for a hand-back
STEP 31 Consider after-tax contributions
STEP 32 Look carefully at supplemental plans
STEP 33 Look for a withdrawal loophole
STEP 34 Consider getting money out through the
back door
STEP 35 5 Be careful when you change jobs
STEP 36 Coordinate with your spouse
PART 4
Investing It 114
STEP 37 Stretch your notion of risk
STEP 38 Take a quick test
STEP 39 Score your wherewithal
STEP 40 Learn the risk basics
STEP 41 Think about correlation
STEP 42 Look at what the pros use
STEP 43 Diversify
STEP 44 Invest in stocks
STEP 45 Consider the case for index funds
STEP 46 Consider the case for active funds
STEP 47 Explore investment styles
STEP 48 Take a look at the bond market
,STEP 49 Invest internationally
STEP 50 Look at the money markets
STEP 51 Examine your plan's investment options
STEP 52 Think about the beauty of dollar cost
averaging
STEP 53 Look at how mutual funds work
STEP 54 Watch the expenses
STEP 55 Get the prospectus
STEP 56 Rebalance
STEP 57 Don't buy company stock or life insurance
STEP 58 Look at the new capital gains rate
P A R T 5
Preparing for Change 162
STEP 59 Be realistic about your new lifestyle
STEP 60 Pay off debt
STEP 61 Pay down the mortgage
STEP 62 Gather your papers
STEP 63 Organize your records
STEP 64 Calculate your net worth
STEP 65 Draw up a financial statement
STEP 66 Review your portfolio
STEP 67 Don't move out of stocks
STEP 68 Look at taxes before you move
STEP 69 Delay collecting Social Security if you can
STEP 70 Consider whether you will work
STEP 71 Consider long-term-care insurance
STEP 72 Put health care in place
P A R T 6
Steps To Take in Retirement 294
STEP73 Don't take the money and run
STEP 74 Consider leaving money with your employer
STEP 75 Consider converting to a Roth IRA
STEP 76 Look at the distribution options
STEP 77 Look at spouse's rights
STEP 78 Don't name a revocable trust as beneficiary
STEP 79 Don't use a Q-Tip
STEP 80 Think about estate planning
STEP 82 Beware of pension max
STEP 82 Complete a living "I
STEP 83 Take another look at your estate plan
STEP 84 Pay attention to special rules for non-
citizens
STEP 85 Tie up loose ends
STEP 86 Look at disclaimer wills
PART 7
403(b)s, 457 Plans, Etc. 226
STEP 87 Bone up on 403(b) plans
STEP 88 Find out what type of plan you have
STEP 89 Compare 403 (b) and 403 (b) 7
STEP 90 Look carefully at the withdrawal rules
STEP 91 Beware of the 403(b)-Keogh pitfall
STEP 92 Watch out for 457 plans
PA R T 8
Sample Portfolios
A top-notch financial Planner clarifies the
risks and rewards of these 14 examples 242
R E S 0 U R C E S 256
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