With recent studies showing that many Americans are not financially prepared for retirement, now is a great time for both employers and employees to start investing in the future. Let’s look at some of the ways these plans can benefit everyone.
If you’re an eligible employee not currently participating in your company’s 401(k)…
What are you waiting for?
A 401(k) plan allows you to deposit money from your paycheck into either a pre-tax or after-tax (Roth) (if your plan permits) retirement source. This not only helps you down the road, it also helps you right now. By setting aside funds, you’re reducing your current or future taxable income.
A few quick 401(k) benefits to keep in mind:
• Participating means less of your hard-earned money goes towards taxes.
• Contributing to the plan is extremely convenient.
• You determine how much you want to set aside each pay period.
• Once you enroll, your contributions are automatically deducted from your paycheck and deposited into your 401(k) account. Easy!
• Money set aside in your retirement account is invested, allowing it to grow, build, and create wealth over time.
• Time is important! The earlier you start saving, the more compounding interest can benefit you!
The table below provides an example of how your retirement plan may compound your small investments into a large sum. The illustration represents the power of compounding interest on salary deferrals only, retiring at age 67. Note: it does not take into consideration compensation increases, deferral increases, or employer contributions.
This is a hypothetical illustration only. It is not designed or intended to project the actual performance of a specific fund or security or retirement plan. Remember that all investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Here are three general rules for participating in your employer's 401(k) plan:
• Defer what you can afford.
• Does your company plan offer a match?
o If so and you are not deferring enough to take advantage of the full employer match, try each year to close that gap until you do not leave any free money on the table.
o Notice within the table above that a match or any non-elective employer contributions are not included! That would be additional free money compounding each year as well!
• Try to increase your deferral rate by 1% each year with a long-term goal of exceeding 15% of your compensation.
If you're an employee currently participating in your company's 401(k)...
Congratulations on investing in yourself! We applaud you for taking steps towards securing your financial future in retirement. While you’re on the right path, make sure not to lose sight of your end goal. Market volatility and changes to your personal situation can affect even the best-laid plans.
It's important to reevaluate your retirement plan at least one a year to ensure you're maximizing your savings potential. Here are a few recommendations for your annual 401(k) review:
• Evaluate Your Retirement Plan Goals: For some, sipping Mai Tais on a tropical beach is the perfect retirement; while for others, it’s spending more quality time with their grandkids.
o Whatever your dream may look like, it’s important to plan accordingly. Make sure that what you’re setting aside now will allow you to enjoy the things you want later.
o For planning purposes, when nearing retirement (1-9 years out), budget to replace at least 70% of your compensation.
• Give Your Account a “Health Check.” You know what you want, now you need to make sure you’re getting there.
o Check that the amount you’re saving and investing is on pace with what you think you’ll need in retirement. If not, try to determine why.
o Is it because your retirement budget has increased? Or maybe you haven’t increased or maximized your contributions?
o If you’re having trouble, our team of financial advisors can help you diagnose and treat any issues to get you back on track.
• Pre-Tax or Roth? Understand the difference and then decide.
o Pre-tax allows you to receive the tax benefit upfront as you don’t pay federal or state taxes on the money deferred, thus reducing your overall current taxable income.
o Roth (if your plan permits) is just the opposite! You pay the taxes now, the account remains tax-deferred and then after 5 years, all of the earnings may be tax-free once withdrawn after age 59 ½.
o Be sure to confirm with your state’s department of revenue or discuss with a tax advisor to zero in on which method might be best for you!
• Has your Risk Tolerance Changed? Review your investments to make sure your asset allocation (stocks vs. bonds) matches your risk tolerance.
o Again, our firm has a team of dedicated, experienced financial advisors to provide guidance in this area.
• Designate Your Beneficiaries: One of the main focuses of National 401(k) Day is highlighting the importance of designating or updating your plan beneficiaries.
o The beneficiary(ies) of an asset like a 401(k) is a critical detail and is often looked at once and forgotten. Make sure to stay on top of the names on the dotted line.
o Please reach out to our team to see if your beneficiaries can be updated online or if a beneficiary designation form is required.
Celebrating National 401(k) Day by starting, securing, or enhancing a financially secure retirement!