Long ago and far away, in a time and place where cars sported lots of chrome and fins, the head of household (we’ll call him Joe) got out of bed each morning and went to work at The Big Company, Inc.
Joe started working at The Big Company right out of school and it was understood that he would work there for his entire career. When he retired, The Big Company’s pension plan would send Joe and his wife a pension check each month that would allow them to enjoy their golden years with some degree of comfort. The Big Company accepted the responsibility for investing the right amount of money each year to ensure that Joe’s retirement (along with the retirement of all of Joe’s fellow workers) would be safe and secure. Joe could count on that pension check arriving like clockwork each month and he could never outlive that income. That’s just the way things worked “back then”.
Today, Joe’s grandson (affectionately called Joe3 by family members faces a much different employment future. The Big Company (TBC) no longer offers its employees a pension plan. Instead, TBC invites its employees to contribute money into a Qualified Retirement Plan.
This Qualified Retirement Plan allows TBC to deduct money out of Joe3’s paycheck each week. Joe3 decides how much will be taken from the check and how that money will be invested. While TBC makes sure that there are many options for Joe3 to choose from, Joe3 is responsible for selecting his investments and monitoring them from month to month and year to year to make certain that he sufficient money to fund his own retirement. If he plans well and the investments perform well, Joe3’s retirement should be safe and secure. If he fails to put enough money into the plan; or, if the investments don’t perform as well as he had hoped and he has too little to retire on … oh well, that’s Joe3’s problem and TBC has no responsibility or culpability for the shortfall.
Since it’s Joe3’s responsibility to make sure he has enough money when he retires, we’re going to take a look at the different plans that Joe3 can choose from; the opportunities that those plans offer and the limitations that are included in those plans. In Part 2, we’ll look at one of the most prevalent Qualified Retirement Plans … IRA’s