Education

Participant Planning for a Defined Contribution Qualified Plan

For  Plan Participants

Funding Your Annual Contributions. A  guideline for setting up your funding to a defined contribution retirement plan may go as follows:

(1) Determine if your retirement account is going to be used for retirement savings or retirement income. This is an important step because you have to decide the extent of your annual funding to your retirement account. When you design your plan for income, you are planning to eliminate the risk of uncertainty of a guaranteed income payout over life expectancy. (2) Calculate a target amount; use a percentage of your preretirement salary that you believe will support your lifestyle. Generally, 70% of your salary is the national average replacement rate. However, additionally adjust this target amount for social security. (3) Determine your risk tolerance. Incidentally risk tolerance has been redefined. Todays definition of risk tolerance means your ability to postpone retirement, or is your job safe? (4) All this data is used to compute your retirement balance of your account on the date of your retirement. Your annual contribution level should be based on this amount