Tuesday, September 16, 2008

Young Woman's Financial Planning Guide

Take Advantage of Your Employer's Pension Plan

There seems to be a number of things to consider when entering the workforce. Like what is business casual anyway? Who has all this money to go out to lunch every day? What exactly is it that my employer does?

Surprisingly, these issues pale in comparison to some of the bigger concerns you'll be facing as a newly minted member of the workforce. In an age of increasing financial instability, it is important for Generations X and Y to take charge when it comes to their retirement futures. By taking advantage of the pension plans offered by your employer, you can take steps towards securing financial stability.

According to a 2006 survey by Hewitt Associates, only 31% of workers ages 18-25 who are eligible for a 401 (k) plan participate, compared to 64% of workers ages 26-41 and 72% of baby boomers. Many of these young workers reason that they can start saving later, but acquiring savings takes time. Below are some basic facts about pension plans that will help you better understand how they work and why they are important.

There are two basic kinds of employer-sponsored pension plans:

1) Defined Benefit: In a defined benefit pension plan, your employer invests money and pays you at retirement. In private company DB plans, the employer will often fund the plan and make investment decisions. The benefits you accrue will be based on your years of service as well as your highest average pay. Most employers require that you stay at least five years to be vested, so this plan is valuable to employees who stay a long time with their employer.

2) Defined Contribution: The defined contribution plan, such as the 401 (k) plan, is one in which you decide to have money taken out of your paycheck to invest in a retirement savings account. Some employers will contribute or match a portion of your monthly contribution. Unlike the defined benefit plan, you will choose your investment options so make sure to choose sound investments when utilizing this plan. The amount you choose per month is taken out of your pay before income taxes are deducted (the overall amount in your account also grows tax-deferred). An employee will usually have to stay 3-6 years in order to vest in the employer’s contributions (your contributions are yours to take with you when you leave a job).

An important consideration to make when thinking about pensions is the tendency of today’s young workers to switch jobs. According to Scott David, president of retirement services for Fidelity Investments, “the typical Gen X or Gen Y will work for seven different employers across their careers.” Although advancing one’s career or changing its course is not necessarily a bad thing, the following tips can help you responsibly maneuver such changes:

1) Wait until you are vested (5 years in defined benefit plans and 3-6 in defined contribution plans) to leave a job.

2) Compare the value of benefits between jobs. A substantial pay increase does not always offset the value of pension growth you stand to lose.

3) Avoid cashing in on your 401 (k) accounts. Though it may be tempting to use this money for a down payment or to pay off a credit card, think wisely about how this will affect your financial future.

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