Voluntary Retirement Contributions
How Much is Enough?
In recent weeks, many articles have been published that focus on behaviors of employees who have access to Defined Contribution (DC) plans. The articles tend to focus on one central theme. Employees who have access to DC plans tend to voluntarily defer less of their own money into their retirement accounts.
The Baylor University Retirement Income Plan is a Defined Contribution plan, which means that an amount equal to 10.8% of an eligible participant's total pay is contributed by the University into a retirement account for the participant. This is an incredible benefit for eligible participants, since unlike matching plans, eligible participants are not required to defer any of their own money into the Baylor University Retirement Income Plan in order to receive the employer funded retirement contribution.
So... what's the issue?
In an August 23rd article published in PLANSPONSOR, it was reported that:
"According to Putnam's Lifetime Income Score, households that defer 0% for retirement are on track to replace 54% of their income at retirement with Social Security, but only 16% without it. Households that defer up to 3% are on track to replace 56% of income with Social Security and 23% without it, and those who defer 3% to 10% can replace 84% of income with Social Security, but 50% without it."
While the defined contribution that Baylor University provides eligible participants is generous, participants should consider how much more prepared for retirement they would be by electing to defer additional dollars into their retirement account. An initial deferral rate equal to one percent (1%) of a participant's total pay is a great way to get started.
Generally, salary reduction contributions can be made in an amount up to the lesser of 100% of your includible compensation or $17,000 (in 2012, as indexed) to all elective deferral plans in which you participate. Additionally, the plan permits the following catch-up contributions to be made by eligible employees:
- Up to $5,500 for employees that are age 50 or older in the current tax year (in 2012, as indexed)
- Up to $3,000* for employees that have worked 15 or more years of church-related service by the end of the current tax year (provided you have not contributed on average $5,000 or more for each prior year of service and provided the additional amounts used under the increased limit have not reached $15,000 or more)
Please be sure to consult with your legal or tax advisor before participating in the 403(b) plan. Baylor University does not provide legal or tax advice.
To get started, click on one of the links below.