03: Accumulated Treasure
By now, your savings and investments must have taken the form of stocks and shares, unit trusts, or bank and building society savings accounts. Based on their current value, it's important to work out how much return these savings and investments are going to bring in for you in the future. Once you have calculated your expected earnings through these savings and investments, do not fret if the predicted earnings don't promise to meet your financial needs in your retirement years, for there is some free money available to you! Most mid-size and large companies have pension plans for all loyal employees, hopefully like yourself. There are several pension schemes used by different companies and it is your job to find out which pension plans you are entitled to use. Companies may also fix pension plans without consulting you, but you should have read about all company policies when you joined! If you haven't, don't ask us why you didn't, but take it as another lesson learnt. If you're still far from wearing the good ol retirement hat, we suggest you study your current pension plans to make sure its satisfactory.
A company pension is designed to accommodate your needs in the future, when you are - on paper - too old to work. There is a contributory company pension, where the pension contribution is automatically deducted from the employee's salary before tax. Some of the nicest employees in the world may choose to match this contribution with their own, so that you will have loads of money available when you decide to clean out your desk, willingly! Similar to this scheme is the non-contributory company pension; where the company contributes the payment towards the pension on your behalf without you ever having to worry about an amount being cut out of your hard-earned salary check.
The Defined-Benefit Plan or Final Salary, too, is an employer-sponsored or free money retirement plan where your pension is worked out according to a formula based on your pay and the length of time you have been in the company or in the scheme. In this case, the employer might be investing money on your behalf. Investment risk and portfolio management are the employers headache, since you don't have a say in either. If, however, the company is not investing the money it is keeping in your Defined-Benefit Plan account, your payout at the end may be worked out as a fraction; for example, 1/60 th of your pay at retirement multiplied by the number of years you worked for the company. So, if you were employed there for 30 years you would get 30/60 th or half of your total pay as a pension. Not bad - we see you are already feeling a sense of self-sufficiency and riches in those years of glory!
One kind of Defined-Benefit Plan is the Tax-Qualified Benefit Plan providing the beneficiary with added tax-incentives. Another type of Defined-Benefit Plan is the Non-Qualified Benefit Plan, under which you will not be able to realize the tax incentives that might have been offered in the one mentioned above.
Some of the other pension schemes you may have subscribed to with or without conscious awareness are: the Defined Contribution Plan, the Money Purchase Pension Plan or the 401(k). You might have put your money in your pension vault through the Open Market Option, after choosing a pensions office in another company that offered you a higher pension income; or gone with the 412(i) Plan - which is for business owners and their employees. Considering how a lot of people don't take much interest in these retirement plans as early as they should be, you may not even be aware of what plan you're on. We suggest you start educating yourself now !
In any case, now is the time to ransack your hidden treasures from the pension trunk. Bring out all the old and dusty yellow documents to figure out how much free money you are going to gather. Whether you contributed towards the pension payouts or the good old company did it for you, it is your time to rejoice. At last, you are in a better position to see yourself through this business of retirement in style. It is a tremendous source of delight to know that all the money you put away has been increased manifold to be paid out when you need it most.
See, your wife was right: All those years of hard work weren't a total waste!