Started by the Plan Sponsor Council of America (PSCA), National 401(k) Day is a holiday dedicated to promoting retirement plan savings education. It’s a day for employers and plan sponsors to provide information to employees on the importance of planning and saving for retirement and how to do so.
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 take a look at some of the ways that 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) retirement source. This not only helps you down the road, but it also helps you right now. By setting aside funds, you’re reducing your current or future taxable income. That means that Uncle Sam gets less of your hard-earned money.
Participating in your company’s 401(k) plan is also extremely convenient. When you decide to enroll, you’ll need to determine how much you want to set aside each pay period. Once the contributions are set up, they’ll be 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. The table below provides an example of how your retirement plan can compound your small investments into a large sum. Time is important! The earlier you start saving, the more compounding interest can benefit you!
The illustration below represents the power of compounding interest on salary deferrals only. It does not take into consideration compensation increases or employer contributions.
If you’re an employee currently participating in your company’s 401(k)…
Congratulations on investing in yourself! We applaud you on 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 out plans. It’s important to reevaluate your retirement plan at least once each 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. 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. 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”
So you know what you want, now you need to make sure you’re getting there. 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. Is it because your retirement budget has increased? Or maybe you haven’t increased or maximized your contributions? If you’re having trouble, we have a whole team of Advisors that can help you diagnose and treat minor issues before they can turn into major problems. There are three general rules: (1) Defer what you can afford. (2) Does your company Plan offer a match? If so, and you aren’t deferring enough to take advantage of the full employer match, each year try and work on closing that gap until you do not leave any free money on the table. (3) Try and increase your deferral rate by 1% each year (with a long-term goal of exceeding 15% of your compensation).
Pre-Tax or Roth?
Understand the difference and then decide. 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. Roth is just the opposite! You pay the taxes now, the account remains tax-deferred, and then after 5 years, all of the earnings are tax-free!
Has your Risk Tolerance Changed?
Review your investments to make sure your asset allocation (stocks vs. bonds) matches your Risk Tolerance. Again, our firm has a team of dedicated, helpful Advisors that can offer guidance to you.
Designate Your Beneficiaries
One of the main focuses of National 401(k) Day in 2024 is highlighting the importance of designating or updating your Plan beneficiaries. Who inherits 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. Please reach out to our team to see if your beneficiaries can be updated online or if a beneficiary designation form is required.
Whether you’re ready to enroll for the first time, or a seasoned retirement account veteran, a 401(k) is a great way to invest in yourself and your future. Celebrate National 401(k) Day by starting, securing, or enhancing a financially secure retirement!
Consider reaching out to our Retirement Plan Advisors to discuss your own goals and have them help you build a Roadmap to Retirement!
Joe J. Pelle, AIF® QKA
Partner / SVP of Employer Retirement Plans Financial Advisor
joe@prosperityadvisors.com
Amber L. Roane, CPFA®
Senior Financial Professional Employer Retirement Plans
amber@prosperityadvisors.com
Christopher J. Dziak
Financial Professional Employer Retirement Plans
chris@prosperityadvisors.com