The overall goal of putting aside funds
for your pension is to be able to live comfortably after retirement.
According to Internal revenue Service regulations, as soon as you
turn (59 1/2), you are able to draw from your
pension without penalty. The distributions you take will be subject
to Federal and possibly New York State Tax, though the first $20,000
received as pension distributions after age (59 1/2)
is exempt from New York State tax.
The question is how to accumulate
enough money to have the option to retire comfortably at an early
retirement age (59 1/2). There are two key
principles. One, start putting funds away for retirement as early
as possible. This could begin in your early to mid twenties. Most
mid size or large Companies offer retirement plans where your pension
contributions are deducted from your gross pay. For example, if you
earn $26,000/year ($500/week) and decide to earmark 5% for pension
contributions, the $25 ($500x5%) you contribute would only reduce
your net paycheck by $15 or $20 per week. In addition, many Companies
will also match your pension contribution up to a percentage of your
gross salary (usually a maximum of 3%). For example, if you contribute
$25 per week, many companies would contribute 12.50/week. These contributions
might seem small, but if you begin early in life and are consistently
contributing to your pension, it can grow to several hundreds of thousands
The second key principle to retiring
comfortably at an early retirement age (59 1/2)
is choosing the proper investment vehicle for your pension contributions.
Many Companies offer several options, such as various mutual funds.
For example, these mutual funds might invest in blue chips stocks,
corporate bonds or a combination of both. Over a long period of time,
it appears that as long as you diversify your stock market investments
through mutual stock funds or individual quality stocks, the stock
market has offered the greatest rate of return.
If you were to begin investing in
stocks and/or mutual funds at age 25 and contribute $2,000 a year
(approx. $40/week) until age 65, you could accumulate over $970,000
assuming a 10% rate of return. If you begin at age 35 contributing
$2,000/year to age 65, earning 10% per year, your investment would
be only approximately $360,000, a difference of $610,000. So one point
to be learned is that it is important to have to have the maximum
years of contribution for your pension to accumulate. If your Company
does not offer a pension plan, you can always make your own contributions
to an Individual Retirement Account (IRA), up to $2000/year if you
are single, and up to $4000 if you are married. Contributions made
to an IRA probably are fully deductible from income on your Federal
and New York State Tax returns. Therefore, if you make an IRA contribution
for the maximum amount, you probably are able to adjust your withholding
at work and take home a little more in your net pay.