RETIREMENT PLANS ARE EXTREMELY IMPORTANT! First, an employer giving an opportunity to save money for retirement is truly a blessing. Your employer does NOT have to offer anything to you. However, they do so because they want to help ease your financial mind. Only through an employer-sponsored retirement savings plan can you save up to the limits of $18,500 a year (for 2018) PLUS be allowed to collect contributions from your employer beyond that. Individual retirement accounts (IRAs) only let you contribute $5,500 per year. Let’s cover what you need to know about your company-sponsored retirement plan.
“A rose by any other name would smell as sweet.” William Shakespeare
We generally refer to a retirement plan at work as a 401(k), but they aren’t all 401(k)s. They are also called 403(b)s and 457 Plans. The name depends on the type of organization you work for. Government and non-profit employers offer 403(b) and 457 Plans, while for-profit organizations offer 401(k) Plans. None-the-less all three plans have maximum savings allowed of $18,500 by an employee. This savings is tax-deferred, which means you contribute to these plans before tax is collected through your paycheck. The tax will be collected when you are allowed to take a withdrawal after age 59 ½. Taking a withdrawal or distribution before then would cause you to pay taxes plus a 10% penalty.
“Do it now, sometimes later becomes never!” unknown
It’s foolish to not contribute to your company’s retirement plan. It’s a great way to auto-save and auto-invest. After studying employees and their behaviors we know that when someone isn’t saving within their retirement plan, it usually isn’t because they can’t afford it, it is more likely they keep putting off taking the setup steps to enroll or there is something they don’t understand. Today plans make setup of your account easy and online. If you are confused, you just have to call a phone number, and someone will help you. That’s it! There is also an increasing trend for employers to auto-enroll employees into their retirement plans once they become eligible. Even if you are auto-enrolled, you can adjust contribution amounts and the selections automatically made for you. Don’t make the setup process the reason you are missing out.
“Whether you can or you can’t – you are right!” Henry Ford
Besides taking action, the other thing that keeps people from saving into their company retirement plan is the act of choosing an investment. Retirement plans are required to have a cash savings option available for those employees who are entirely averse to risk and don’t want to invest in the stock or bond markets. It’s the amount you are saving per paycheck that is proving to have the most significant impact on your retirement goal success.
Knowledge is key to feeling more confident about your investment or fund choices. Many plans offer mutual funds for specific age groups or retirement date goals. These funds are diversified investments that will contain a mixture of stocks and bonds, in addition to being professionally managed. The percent allocation to each security type will adjust over time to reduce risk. Investors should not be afraid to select their funds and asset allocations, as long as they are willing to commit the time to researching the fund options and monitoring their performance and risk as time marches forward. You can handle it!
Never avoid saving into the plan because you don’t understand the investment choices. Start contributions today and then you can worry about selecting the right investment.
“Debt gives you the ability to look like you’re winning when you’re not.” Dave Ramsey
We all know consumer debt is bad for us, yet so many turn to their retirement plan for a loan (20% of 401(k) savers have a 401(k) loan). Try to avoid it at all costs. Here’s what you need to know:
1) The max you can borrow is $50,000 or half your account value
2) Loans typically are five-year terms (this can vary so check your rules)
3) Repayment starts right away and deducts from your paycheck with after-tax money
4) If you leave your job (no matter the reason), the loan balance is due right away; many times within 60 days.
5) The loan portion of your account value will miss out on growth opportunity.
Get motivated for your future and remember that the sooner you start saving the better off you’ll be. Contribute to your company’s plan at least up to any employer match percentage. It’s ok if you can’t contribute up to the match, but do something! Don’t let this opportunity pass. For those of you who are just starting to work at a firm with a retirement plan, don’t be afraid to ask for help to get started. Your boss will also see your savings as a commitment to your job and employer. They will know you are thinking about your future.
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