Planning for Your Retirement

by James Lange

America faces a pension crisis of epic proportions. Some 30,000 "defined benefit plans" are under-funded to the tune of $450 billion. And most financial experts believe the law Congress just passed, the Pension Protection Act of 2006, is at best a band-aid on the problem.

The law sounds an ear-splitting clarion call to the 44 million Americans covered by traditional pension plans. You're on your own!

You, and only you, are responsible for funding your retirement. You can no longer depend on your employer and it's hardly worth mentioning that Social Security isn't going to get you very far. As corporate icons like GM, Verizon, IBM, Sears, Lockheed Martin, Motorola, Circuit City and Hewlett Packard declare pension freezes, Americans need to reevaluate their retirement plans.

The new law is designed to protect not only workers, but also the Pension Benefit Guarantee Corporation (PBGC), the pension provider of last resort that has to step in when companies renege on their promises. The PBGC is ultimately funded by (who else?) the U.S. taxpayers. If enough companies fail to fund their pensions, the potential bailout could make the savings and loans bailout look like chump change.

The average American is probably wondering, how will the Pension Protection Act of 2006 impact me?

  • Employees must make the huge psychological shift away from "someone will take care of me" to "I must take care of myself." As more employers decide to terminate their defined benefit plans, employees who had been participants in the plan will be at risk for losing their pensions (worst case scenario), or reduced pensions (best case scenario). New employees would be required to participate in defined contribution plans, which transfer greater responsibility to the employee to save for retirement and assume all of the investment risk. And if there is no employer matching for the defined contribution plan, the total responsibility of saving for retirement falls on the employee.

  • Employees must save as much as possible for their retirement years, starting right now. With the shift from defined benefits plans to defined contribution plans, employees must learn that it is critical to fund their Roth 401(k)s (if available), 401(k)s, Roth IRAs or traditional IRAs (if eligible) and other retirement plans to the maximum.

  • Contributing to your retirement plan is now "automatic." The new law makes it easier for employers to automatically enroll their employees in the company's 401(k) plan. The company would set default contribution limits and the employee would have to "opt out" should he (unwisely) decide to not participate.

  • It just got a lot easier to save for retirement. On the plus side of the equation, the new law makes permanent incredible income tax saving vehicles that will allow taxpayers to make larger IRA, Roth IRA Roth 401(k) and other retirement plan contributions. Prior to the law's signing, some of the contribution limits and other provisions were due to expire in 2010. Since these laws are now permanent, taxpayers can confidently make retirement and estate planning decisions to secure their future and their family's future.

Even if you're one of the countless small business employees (or self-employed individuals) who never had a pension to lose, you would do well to buy into the overarching "self-reliance" theme embodied in the new law.

You must take decisive action to shore up your retirement savings. Sit down with a qualified retirement planning expert and plot out a reasonable, long-term strategy that depends, for the most part, on your own ability to maximize your retirement assets. If you fail to take the responsibility for your retirement security onto your own shoulders, you are seriously endangering your "golden years." The tide is turning toward self-reliance, and those who don't go with it will be swept away.

James Lange, CPA/Attorney, is a nationally recognized IRA, 401(k), and retirement plan distribution expert with over 27 years of experience. His recent book Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do (Wiley, 2006, ISBN: 0-470-04354-7, $24.95) is available at bookstores nationwide and from all major online booksellers.

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