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9/19/2000

It's Time to Start Saving

Kate Traynor

Now that you're a pharmacist, one of the most important things you can do with your new income is to start planning for your retirement.

Even with loans to repay, you can afford indulgences that were out of your financial reach when you were a student—and still have money left over. Why is it important to reserve some of this money for the distant future? 

The Social Security tax that your employer withholds from your paycheck makes a noticeable dent in your take-home pay. Although this money is earmarked for retirement expenses, it's unlikely that the Social Security benefits you receive after retirement will be enough to maintain the lifestyle you had while employed. If you want to retire comfortably, you'll need to save additional money. 

Many employers have retirement plans, and you should learn all you can about the benefits your employer offers. Two common but very different retirement benefit programs are 401(k) and pension plans. Other options exist, but these are the two you're most likely to encounter. 

Traditional pension plans are completely funded by the employer; no money is taken from the employee's salary to build the pension account. When you retire, a complex formula involving salary, age, and years of service is used to calculate the amount of pension money you'll receive. 

The catch? You usually need to work for the company for many years to receive a good pension. If you are young and leave your job after a short time, expect to receive little or no pension money from that employer. 

In contrast to pension plans, 401(k) programs—named after a section in the U.S. Internal Revenue Code—are normally funded with money from both the employee and the employer. The employee specifies a percentage of salary to invest, and the employer deducts this amount from the paycheck before withholding money for taxes. This type of deduction decreases the employee's taxable current income. The investment can grow tax-free until the employee retires and starts using the money. 

The money you contribute to a 401(k) plan is yours at all times. You can withdraw your money if you need it before you retire, but the Internal Revenue Service will impose heavy penalties. However, some 401(k) plans do allow you to borrow your savings to buy a home or deal with a hardship. For a simple description of the pros and cons of using 401(k) money to purchase a home, visit iVillage, Inc

Your employer may match a portion of the money you invest in your 401(k) plan; some organizations match employee contributions with company stock instead of cash. You may need to work for your organization for up to five years before the matching funds belong to you. After this period you are vested in the program, meaning the matching funds are yours and are subject to the same tax rules as the money contributed from your paycheck. 

What happens to your 401(k) money while you work? Through the program your employer has set up, you select mutual funds or other investment vehicles of varying risk levels. The money in your 401(k) account gains or loses value, with no tax consequences to you until you retire or withdraw the funds. 

You employer or the third-party investment company that manages your 401(k) money should periodically send you notices about the plan, including performance reports. Don't stuff this literature in a drawer without first reading it—you may miss important announcements about changes to your investment options. Ask the investment management company or your employer to explain any documents that you don't understand. 

If you leave but do not retire from your job, your employer may let you keep your 401(k) money in your existing retirement plan. You may also have the option to transfer the funds to your new employer's retirement plan. Alternatively, you can roll your 401(k) money into a qualified Individual Retirement Account, or (IRA PDF). 

Saving for retirement is just one part of the financial plan that you should develop when you begin your professional working life. Your future may include children, education expenses, and the care of aging parents; budgeting for these expenses now can ease your financial burdens later in life. 

If you're ready to start investing, the Securities and Exchange Commission and the Consumer Federation of America in conjunction with NationsBank offer free financial planning advice in plain language.