A little 401k trick
Apr 18 '00 (Updated Apr 20 '00)
Here is a little trick that one of my co-workers told me. I am vested in three pension plans, which means I would receive something from each of the companies that I worked for when I retire.
When one usually retires at 65 and starts to draw one's pension, one has several options to receive the funds. These are called settlement options. You get the most money if you settle a pension for life, that is when you die your pension stops and your survivors get nothing. You can settle for 10 years certain which means that your estate or spouse will continue to be paid for at least 10 years even if you died 1 year out. The more money that you have guaranteed paid to you, the less per month you can collect.
You can also start to collect your pension at age 55, but you give up about 2% per year or 20% of the amount that you would have received at age 65. You also pay taxes on your pension.
Now for the trick if you will. This really only works if 1)you cannot afford to max out your 401k percentage, and 2) you are not a highly compensated employee whose contributions are limited. It is very simple, start to draw your pensions and increase your 401k contributions to offset the additional income.
I ran the numbers (of course being an accountant) to see what would happen. By collecting my pensions for 10 extra years the difference and investing in a tax deferred 401k assuming 8% return (mix of stocks and bond funds)I am ahead of the game until I'm 82 (6% = age 78).
The plus is this: At anytime all the money in the 401k is mine. Should I die anytime between 55 and 82 I am way ahead of the game. Or should I say my wife is!
This is not for everyone, but it does give you something think about in your spare time.
One other thought about 401k and IRAs. In my position, I am responsible of our payroll department. Not one person has stopped his or her contribution because of the recent stock market correction! Every week people are putting money away for retirement. The baby boomers are stashing cash away. Most of this money is finding its way into stocks.
As people get close to retirement they will be taking money out of their 401k/IRAs. If you look at the baby boom curve, older boomers will be taking $$$ out while younger boomers will still putting in. At some point there will be more people taking out than putting in. When more money comes out than goes in prices will deflate(simple supply & demand). I think it will be a gradual thing and the top of the market will be about 2005 or 2006. I am not an expert on investments but again you should think about it. I look forward to any comments you may have on my theory.
 |
|
|
|
|
|
|
Epinions.com ID:
1Goodguy
|
|
Reviews written: 29
Trusted by: 16 members
|
|
|
© 1999-2009 Shopping.com, Inc.