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retirees. Currently, the age at which a person can begin collecting partial Social Security benefits is 62 , but if they wait until age 67 , they are entitled to full benefits. Medicare. Medicare is a FICA sponsored federal health insurance program for people 65 or older . It pays for hospital stays, care in a skilled nursing facility, hospice care, certain doctors’ services, outpatient care, medical supplies, and preventive services. Every pay period,
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Das Retirement The first modern old age and disability pensions
were introduced in Germany in 1889.
employers collect a tax of 1.45% of an employee’s earnings and pay it into a Medicare fund. Like Social Security, the money is not placed in an account for the benefit of the employee. It is immediately paid out in benefits to current Medicare recipients.
III. Private Sources of Retirement Income
401K Retirement Plan As you learned in Chapter 4, Pay. It’s More than a Salary, the defined benefit (pension) plan, which is a retirement plan completely funded by the employer, is going the way of the dinosaur. Although it still exists in some sectors (particularly in public sector jobs like police and fire departments and government agencies), it’s far more likely that you will participate in a 401K retirement plan . A 401K plan is named for the Internal Revenue code section that deals with retirement plans and it is a popular employee benefit. You may not realize it now, but a 401K plan will play a very important role in your financial future . To be financially literate you should have a basic understanding of the 401K retirement plan: Contributions. Recall from Chapter 4 that a 401K retirement account is funded by contributions from the employee or both the employee and employer. Also recall that the money an employee contributes to their 401K is deducted from their paycheck in pretax dollars . This has the benefit of reducing the amount of income tax the employee pays. Currently, an employee can contribute a maximum of $18,000 to their 401K each year — $24,000 if they are over 50 years old. Another important thing to know about a 401K is that investments grow tax deferred . That means the employee pays no taxes on the earnings until they begin to make withdrawals which are not permitted before age 59 ½. Maxing and Matching. As an employee benefit, many employers match the employee’s contributions to their 401K up to between 3% and 8% of the employee’s salary. For example, let's say an employer has a 401K program that matches the employee's contributions up to 4% of the employee's salary. Under that plan, an employee making a salary of $35,000 is eligible to receive up to $1400 in retirement fund contributions from their employer each year. To receive this “match,” the employee must be participating in the plan and contributing at least that same amount. Experts advise, that an employee should, at the very least, max out their contribution . That means they should always contribute an amount to their 401K that triggers the highest of the employer’s matching funds . It’s basically free money. A 401K retirement plan is a valuable tool for building a comfortable retirement. Note also that the amount by which an employer matches is a matter of industry standard. PRODUCT PREVIEW
Chapter 10 | Your Risky Retirement 178
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