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Say that
you are one of fifteen employees who work for a small business.
This business, understandably, cannot afford to pay for your
retirement. I'm talking no pension, no IRA with or without
matching plans, nothing, nada, zip. And, while you make a
decent income, you might not have saved for your future. Don't
feel alone - you're among 75 million people who will end up
with little more than Social Security to support them in their
old age.
Additionally,
if you recently received your Social Security statement, you
may have realized that you might be lucky to receive enough
money for one year's worth of living expenses from this government
agency when you retire. So, what do you do? Do you find another
job with a retirement plan? Do you cut out that latte in the
morning and stash the cash? Or, do you want the government
to intervene?
If the
automatic, or auto, IRA is passed by Capitol Hill, you may
have a chance to be enrolled in an individual retirement account
(IRA) through automatic payroll deductions. The bill, which
has two components (S.1141 and H.R.2167), was co-sponsored
by House Representatives Richard E. Neal (D - MA) and Phil
English (R- PA). David C. John of the conservative Heritage
Foundation and J. Mark Iwry of the liberal-leaning
Brookings
Institution [PDF] designed the plan
behind the bill.
From the
information shown above, the plan seems to have bipartisan
support - at least in this initial phase. And, at face value,
the plan seems to be ideal for the worker who wants to save
for his future, but who has little to no discipline for saving.
This is how the auto-IRA will work under the proposed legislation,
according to the recent AARP
Bulletin:
- All
employers who have been in business for more than two years
and who have more than ten employees would be required to
provide auto-IRAs if they offer no other retirement program.
- Under
the auto-IRA plan, you could select a specific amount to
be deducted from each paycheck. This amount would be forwarded
to a traditional IRA, where contributions are tax-deductible
but where withdrawals after retirement are subject to tax,
or a Roth IRA, where contributions are not deductible but
withdrawals are tax-free.
- Your
contribution amounts would be three percent or more of your
pay, although IRA general limitations apply. In other words,
you cannot contribute more than $4,000 in 2007, with a catch-up
amount of $1,000 if you're over age 50. The annual limit
for 2008 and beyond is $5,000 with the same catch-up amount
for age 50-plus employees.
- You
would be able to manage this account, and you could take
it with you when you change jobs. But, no matter where you
work, you and you alone are responsible for the deductions.
Employers - at least at this time - are not required to
add to the fund.
As a business
owner, I can tell you that many employers might be a little
leery about this plan. It almost sounds too good to be true,
especially when employers aren't required to pay into employees'
plans, won't be held liable for any employee decisions, and
yet will receive tax credits to offset the cost of setting
up the system. I keep looking for the word or the sentence
or even the invisible notes between the lines in this bill
to find the one glitch that will set off the sirens?but I
haven't found it yet.
According
to a 2006 Investment
News article, this plan is expected to bring in as
much as $100 billion in new investments within five years.
If you read further into this article, you'll discover that
financial advisors are excited about this plan, as it might
mean more business for their coffers. Guaranteed, it will
provide more income for the financial services industry, especially
with fees accrued from developing these IRAs.
With that
said, employees who haven't invested in the past will be in
a precarious position unless they do a little research if
this bill passes. If you are one of those employees who works
for a boss who doesn't offer a retirement plan, I would suggest
that you seek information about IRAs so you know your options.
After all, you'll at least have some inkling about how some
retirement plans work even if this bill doesn't pass.
You do
have two other options - you don't have to go with this retirement
plan even if your boss is required to take it on. You can
opt out. Or, you can agree to have your money invested into
a low-cost investment fund as defined by Department of Labor
regulations. In other words, ready-made, low-cost accounts
managed by the financial services industry would
be provided [PDF] for those individuals and employers
who prefer not to make investment decisions.
This latter
choice might be a good one for those employees who don't want
to conduct research; however, I would seriously consider whether
you trust your boss to pick out a retirement investment for
you. After all, supposedly that boss is not going to be held
liable if your investments don't produce a profit - or even
if you end up with losses.
Think
about this - if you had forgone that cup of coffee every morning
for the past twenty years, you could have saved more than
$10 per week. If you socked that $10 per week into an account
that earned eight percent per year, you'd have more than $25,000
by now. If you left that money in the account for another
ten years (30 years total), you'd have almost $60,000.
Basically,
this auto-IRA will give you the freedom to deduct that $10
(or more) from your paycheck each payday. This is what that
plan is all about - dollar cost averaging (similar to E-ZVestsm
with BUYandHOLD). The bonus? You still might find enough change
every morning to purchase that latte.
Until
Next Week,
Linda Goin
The securities
markets are subject to the risks of fluctuating prices and
the uncertainty of rates of return and yields inherent in
investing and past performance is no guarantee of future results.
Periodic
Investment Plans, Dollar-cost averaging and Compounding do
not assure a profit and do not protect against losses in declining
markets and you should consider your financial ability to
continue to purchase through periods of low price levels.
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