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Spring Forward Your Employer Retirement Plan Deferral Contribution!

Spring Forward Your Employer Retirement Plan Deferral Contribution!

March 06, 2024

This coming weekend, most of us will move our clocks forward by one hour to adjust for daylight savings time. No one enjoys losing an hour of sleep so we would like to suggest that you use this event as a reminder to “Spring forward” your Employer Retirement Plan deferral contributions using your Company Retirement Plan!

Periodically increasing your deferral rate is a good habit to get into and doing so allows for further compounding of interest to occur over time! With the uncertainty of Social Security in the future, you will find that more of the responsibility of providing yourself a confident retirement income falls on you.

Working with employees has led us to the conclusion that employees need to consider increasing the amount they contribute to their Company Retirement Plan (over time) in order to reach their desired retirement goals.

Many employees start out contributing a small percentage of their salary early in their career (which is absolutely fine) but often forget to make increases as their career progresses and their salary increases, leaving them with a shortfall at retirement. Making an annual commitment to increase your Employer Retirement Plan deferral amount is a great habit to consider.

When contemplating an increase of your payroll deferral amount, consider what might make more sense for you as an individual. By this we mean, should you increase your Pre-tax deferrals or Roth deferrals amounts from your paycheck? Maybe it is a little of both and it is a question that we get asked every day! And like many things in life, the answer is it depends, as one size does not fit all! Pre-tax deferrals from your paycheck means you get a benefit up front as you do not pay Federal or State taxes on the amount deferred, thus lowering your annual taxable income. Your dollars stay tax-deferred and you begin paying tax on those dollars as you make withdrawals (normally in retirement). Another option is if your employer plan allows for Roth deferrals. Roth contributions from your paycheck means you contribute on an after-tax basis (paying the tax now on the entire amount contributed) so there is no upfront tax benefit, but the overall balance remains tax-deferred and after the Roth amount is in the Employer Retirement Plan for 5 years, all the earnings become tax free upon withdrawal in retirement! The big question is, do you need the benefit of tax deferral to lower your tax bracket now and worry about paying the tax as you begin making withdrawals (normally in retirement)? Or would you benefit by paying the tax now and letting it potentially become tax free in the future? We can certainly help discuss this tactic with you, but you would be doing your future self a favor by discussing this with one of our Prosperity Financial Advisors as well. Remember, it is your money, your future, and your retirement!

Regardless of if you defer Pre-tax or Roth, you may be surprised by the impact that a slight increase on an annual basis can have on your savings amount at retirement. You might not miss a 1% decrease in your paycheck but overtime, however, your account balance will surely notice it! Your overall goal as employee is to make it to retirement and enjoy our remaining years without fear of running out of money.

Take a look at the examples below of how a 1% annual increase can help your savings goals!

Employee A earns an annual salary of $50,000, decides to defer 6% of their salary, and earns an estimated annual rate of return of 8% each year. Keep in mind that some years the rate of return might be more than 8% and, in some years, less. This is just a hypothetical illustration. After 10 years of deferring at the 6% rate, their estimated balance is $48,900.52.

Employee B also earns an annual salary of $50,000 and decides to start out with a deferral amount of 6% but decides to increase their deferral amount by 1% each year! Also earning estimated annual rate of return of 8% each year. After 10 years of deferring with 1% increases each year, their estimated balance is $82,400.65.

Compound interest is interest that applies not only to the initial principal of your account, but also to the contribution amount that you defer plus interest on the accumulated interest from previous periods! To go one step further, these illustrations do not include possible promotions (with higher salary increases), or if your Employer Retirement Plan offers an employer match or profit-sharing contribution, (meaning the values could even be higher)!

It is never too late to start planning for your future, so take a look at your cash flow and see if there is a way to add that extra 1% (or greater) increase into your Employer Retirement Account each year!

Our request for this weekend is to not only spring your clocks forward but consider springing your retirement forward by increasing your deferral rate by 1%!

As always, please do not hesitate to reach out to us if you have any questions or would like to discuss your retirement goals!