Pension Plan Anniversary Occasions Understanding Retirement Options

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Bills.com offers primer on retirement funding.

Happy birthday, retirement! This month marks the 84th anniversary of the first U.S. pension plan -- providing a great occasion for workers to understand their own retirement benefits, said Brad Stroh, co-founder and co-CEO of free online consumer portal Bills.com.

While pensions were developed in European countries early in the 19th century, they arrived in the United States in 1875. By 1997, about half of all workers had pension plans. Originally, employers offered pension plans to provide deferred income to employees after they retired. By the 1990s, more employers turned to 401(k) plans that encourage employees to contribute to their own retirement funds. Now, in many companies, pension plans are falling by the wayside.

"Whether you have a pension or not, a successful retirement plan begins with understanding your retirement benefits," Stroh said. "Look at every aspect of your anticipated retirement income, determine how much income you will need to retire, and arrange to fill any gaps so you can enjoy your golden years."

Stroh's suggestions include:

1.    Understand the pension. Two types of pension plan exist. A defined contribution plan means the employer places an amount of money in a retirement account on the employee's behalf. With a defined benefit plan, the employer promises the employee will receive a certain amount of funds (benefit) upon retirement. Defined benefit plan funds are insured to a certain extent by the Pension Benefit Guaranty Corporation (PBGC), a federal agency to which employers pay premiums. In 2006, 43 percent of workers participated in a defined contribution plan, while 20 percent participated in a defined benefit plan. In recent years, the 412(i) pension plan has become a viable retirement savings vehicle for successful small-business owners.

2.    Add the value of a 401(k) plan. Some organizations offer a defined contribution plan -- such as profit-sharing or other investment -- as well as a 401(k) plan. Employees contribute to the 401(k) plan, and employers may or may not match their contributions. Online calculators can help estimate the eventual value of your plan at the time you retire. Example: http://www.bygpub.com/finance/RetirementCalc.htm

3.    Evaluate Social Security. While Stroh notes that younger employees tend to plan not to count on Social Security, they still should understand current planned Social Security benefits. Workers automatically receive a summary of their estimated annual Social Security benefits annually a few months before their birthday. "For most people, these benefits would not be enough to support their current lifestyle during retirement," Stroh said. "However, the Social Security summary is a great annual reminder to contribute to your own retirement investments."

4.    Look into IRAs. An IRA (individual retirement account) allows workers to save for their own retirement, instead of or in addition to an employer retirement plan. People under age 50 can contribute up to $4,000 this year; those 50 and older can contribute up to $5,000. For 2008, those limits rise to $5,000 for those under 50 and $6,000 for those 50 and older. Depending on income, contributions can be made tax-free (with a traditional IRA) and taxed upon withdrawal, or made after taxes (Roth IRA) and withdrawn tax-free during retirement.

5.    Calculate needs. A ballpark estimate is that retirees will need 70 percent to 80 percent of their peak annual salary for a comfortable retirement. Add up anticipated expenses: costs for home payments and maintenance; food, clothing, utilities, transportation and other necessities; hoped-for expenditures on luxuries like dining out and travel; and a realistic estimate of medical expenses. For a personalized blueprint, a financial planner can help craft a detailed plan for retirement and beyond.

"The numbers can seem like a headache, but nothing could be more painful than reaching retirement age and realizing your accounts fall short," Stroh said. "As the saying goes, 'Failing to plan is planning to fail' -- but luckily, the first pension plan founders made a plan -- and you can, too."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 10,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.

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Aimee Bennett
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