This is part 1 in a series to explain what you need to know about your Peter Pan Seafoods (PPSF) 401k plan and 401k plans in general. Part 1 is tailored for PPSF employees, however, much of it applies to all 401k plans.
In part 1 of this series, I want to explain why it’s probably a great idea to enroll in and contribute to your 401k plan. Let’s get started.
401k - What is it?
A 401k plan is a type of government approved retirement account that employers can set up and make available to employees. 401k plans were authorized by Congress in 1978 and companies began creating them and offering the plans to their employees within a couple of years. Most larger companies offer them. An estimated 70-80 percent of American workers have 401k plans available at their work. Unfortunately, most small companies do not offer 401k plans to their employees.
The majority of 401k plans are set up as a traditional plan with employee contributions deducted from paychecks on a pretax basis. That saves you some income tax money when you contribute, however, the tax man has a long memory. Income taxes will be due whenever you begin withdrawing money from your plan during retirement.
PPSF’s 401k plan is a traditional plan; employee contributions are deducted from your salary on a pretax basis.
Who Can Participate?
Which PPSF employees can participate in the 401k plan? To my knowledge, W2 employees who are not in a union and have worked for PPSF at least a year may participate. There may be a minimum number of hours that must have been worked during each year. PPSF is under new ownership and perhaps there are changes I haven’t yet heard about. However, I’m fairly sure PPSF will continue offering the 401k plan. You should check with your payroll or HR representative to learn if you are eligible.
Along with union employees, I believe any contract employees are also ineligible to participate.
Why You Should Participate
Perhaps you are wondering why you should participate. Let’s explore this. First, I have some questions you may want to consider.
Will your Social Security pension be equal to or larger than your normal annual earnings?
Do you expect to receive income from multiple sources in retirement that, all together, will equal or exceed your normal annual earnings?
Do you want to be stuck at home during retirement?
Are you filthy rich?
Did you marry a very wealthy person?
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If you answered no to my questions, a well funded 401k account could help you enjoy your retirement years.
Financial planning and retirement experts usually advise people to plan on multiple income streams for retirement, if possible. That’s easier said than done, for sure.
Most everyone will receive a Social Security pension, however, it likely will NOT be enough to live comfortably. Many people will NOT have another source of income in addition to their Social Security.
There are numerous options for generating additional income streams. Many require an enormous amount of work and entail a lot of risk.
Participating in your 401k plan is one of the easiest and least risky ways to ensure some additional income over and above your Social Security pension.
Let’s take a look at some advantages of 401k plans.
Tax advantages. Your contributions are deducted directly from your paycheck before taxes are computed, so Uncle Sam actually helps you.
Flexible contributions. You can decide how much to contribute and adjust the amount up or down, depending on your circumstances.
Time helps you. The earlier you start, the longer that compounding will help grow your account. Albert Einstein was once asked what was mankind’s greatest invention. He replied “Compound interest.” Einstein further stated “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Portability. Your contributions are yours even if you quit or change jobs. You can usually leave your money in the plan after quitting a job. There are also options to transfer it to a new employer’s 401k plan or into a personal IRA. Note: Avoiding penalties requires careful adherence to IRS guidelines, so seek professional guidance and/or carefully research IRS rules before initiating a transfer.
Painless participation. It’s so easy to enroll and have your contributions deducted automatically. You won’t miss money that never passes through your hands. You can start small and increase your contributions over the years as you receive pay raises.
Free money! What? Yes, I said free money. Well, almost free. For each 401k plan participant, Uncle Peter puts a stack of money, the company’s 401k match, on the table right where you can see it. It’s your money for the taking! (I may have embellished a little, but you get my drift.) You just have to recognize the value of it and prove this to Uncle Peter by contributing some of your own money. This company match is discretionary and not legally required, however, Uncle Peter wants to help those who help themselves. For each dollar you contribute, PPSF adds 50 cents up to six percent of your pay. So if you contribute 6% to your account, PPSF will add 3% more. That’s an immediate 50% return on your money! Note: PPSF’s 401k matching policy is subject to change. Also, there is a vesting schedule of 5 years if it hasn’t changed. You may lose some of the matching money if you quit or get laid off and subsequently transfer your money out before 5 years of employment. Seasonal employees keep the matching contributions even though they are laid off for part of each year. Note: There may be a small number of PPSF employees who are ineligible for the company match. Check with your payroll or HR representative to be sure.
Tax deferred growth. Your money grows tax deferred, which results in faster growth by pushing off the taxes due on investment returns.
Investment tax credit. Some lower income employees can actually receive a tax credit for a portion of their 401k retirement plan contributions on the first $2,000 annually. This credit is called “Retirement Savings Contributions Savers Credit.” The rules are a bit complicated, but Uncle Sam really wants to help those who need it the most. Note: A tax credit is much better than an income deduction. To read more, search for IRS Form 8880.
Do I sound like a cheerleader, or what?
Example Scenario
Quick example. A seasonal employee, Joan, making $6,000 per summer contributes to her 401k for 15 years. Joan contributes 6% or $360 and PPSF adds 3% or $180 annually for a total of $540 contributed each summer. Joan contributes $5,400 total over 15 years. If she invests it conservatively and gets approximately 7% returns, she will have close to $17,000 after 15 years. After 25 years, Joan will have contributed $9,000, however, she will have accumulated more than $46,000. After 30 years, Joan will have contributed $10,800 and will have accumulated over $75,000.
Growth of Joan’s 401k Account (Image courtesy of Portfolio Visualizer)
Adjust Joan’s investment style to moderate/aggressive, and her 15, 25, and 30 year totals become approximately $24,000, $70,000, and $125,000 respectively.
Joan can have all this for the equivalent of 2-3 fancy Starbucks coffees a week!
Will You Enroll in Your 401k Plan?
That wraps up Part 1 of my 401k Tutorial Series, why you should enroll in your 401k plan. I hope I persuaded you to enroll in and contribute to your 401k plan or to at least seriously consider it!
Will you?
Please let me know if you have questions!
Stay tuned for part 2 of this series. I’ll explain 401k asset allocation strategies in the next article of this series.
Thanks for reading!
Until next time,
Mike