Don't Mess With Taxes

Yesterday truly was a day to be thankful. My husband and I played hosts for a Thanksgiving meal for the first time in … well, ever. For most of our married life, we’ve lived 1,500 or so miles away from family so it’s been just the two of us on most holidays. But this year, we’re just down the road from one of my aunts and she and a friend spent the afternoon with us.

The weather was gorgeous; maybe a tad too warm for late November to my way of thinking, but I’m alone on this one and it at least was clear and calm. The food was good and plentiful, thanks in large part to the culinary largesse of my aunt who, true to her mom’s (my grandmother’s) tradition, cooked more than enough side dishes to supplement my basic turkey day menu. I think we’ll be eating leftovers until February … except, of course, for the excess pie that should be gone by Sunday night.

We had plenty of wine, too. And the company was most definitely good. The only downside: Our Cowboys lost an overtime heartbreaker to the Broncos. We tried to use our combined wills to pull the ’Boys through, but I guess no amount of wanting can make up for a defensive lapse. We were glad, at least, to have had some extra help in trying to send our psychic support to Texas Stadium. My aunt’s friend is a big Cowboys fan, too, and he was greatly pleased that we ate at the kitchen table, with the TV in full view and the game, sound included, still on. We may be spending more time watching Cowboys playoff games (yes, they will make it in; you heard it here first) with him, as he just retired and is moving to the Austin area.

Having just relocated a few months ago, I don’t envy him that process, but I must admit that I do envy the fact that he’s financially able to choose retirement on his own terms. His company wanted him to stay; he was ready to retire. More importantly, he was able to retire. 

Retirement is luxury for many people. Some keep working well into their 70s and 80s because they want to, but a lot of folks keep punching the time clock because they have to. And it appears that the number of necessity-based older workers could be increasing. Just a couple of generations ago, when you committed the bulk of your career to a company, one of the benefits was a nice chunk of retirement change that the company sent out to you on a regular basis. This traditional retirement system, known as a defined benefit plan because your employer contributed a set amount to your retirement fund and you knew exactly what you’d be getting when you left, is fast disappearing in the American workplace. Even workers in unionized industries where such perks were thought to be sacrosanct are watching in dismay as their retirement money evaporates. Just ask all those GM employees who could be facing greatly reduced pension income if the company files for bankruptcy.

Even if you're lucky enough to work for a company that still offers a traditional pension, you're probably not a traditional worker. Few of us now stay at one place long enough to vest, i.e., earn full rights to their retirement money. And vesting alone doesn't mean what you'll get is what you'll need. When I left the last place I worked that had a pension plan, I stayed long enough to vest, but not long enough to get an eventual payout that will make any realistic retirement expense difference. Don't get me wrong. I'll certainly take the $212 bucks a month that I can claim when I hit 59 and a half, but I guarantee that I'm going to need a lot more than that.

That’s where defined contribution plans come in. Most commonly known as 401(k)s, these plans are footed primarily by you, the worker. My traditional pension plan company offered one of those, too, and I'm glad I participated in it. The benefits here: You decide how much you will need and/or can afford to put away now for tomorrow and you get to take that amount with you when you change jobs. If you’re lucky, your boss will match a percentage of your contributions and if you stay three to five years, you get that amount, too, to take along to your next job.

401(k) plans and their like (different numbers from the tax code are used to differentiate different types of companies and plans, with tax-exempt organizations, for example, offering their workers 403(b) plans) also have tax benefits. Your money goes into the accounts before any employment taxes are taken out, reducing your current tax bill a bit, and the earnings on the account grow tax-deferred until you take out funds at retirement. 

The problem with this plan, according to figures in the latest “Clark Said” newsletter, is that one in four people who participate in a 401(k) don’t put in enough to get a company match. Around another quarter don’t even put in any money at all. If they’re depending on Social Security, they’re out of luck. Even if there’s no major change to the Social Security system (which is looking likely at least until after the 2006 elections), in today’s economy the current program will never suffice as the sole support of anyone’s golden years.

And a lot of workers don’t have access to 401(k) plans. They work for companies that don’t or won’t offer them. In this case, retirement is totally up to you via an IRA. Yeah, it does get complicated. And I know it’s not fun to think about a distant future, especially one that could be costly. But it’s something you can’t ignore.

So in this holiday season while you can be thankful that you have job, don’t forget that someday you might, like my aunt’s friend, want to quit working. Make sure you take the steps now so you’ll be able to do just that.