Planning for the Golden Years: 401(k) Pointers to Take to the Bank
October 14, 2009
Whenever you start a new job, it is always a learning experience. Will I do a good job? Did I make the right move? Where is the bathroom? The questions and anticipation can make anyone nervous. So when your Human Resources department comes around with the three inch stack of paperwork, it’s easy to find the nearest empty drawer to dump the paperwork into and get back to finding the best parking space. Little do you know that the company that just hired you was offering a 6% raise in that HR package.
By several accounts, nearly 1 in 3 people does not participate in their company’s 401(k) or similar retirement plan. If you are that one person, look to your left and to your right (if you are in a cube, then ‘prairie dog it’ and sneak a peek over your cube wall.) Assuming they are in the same job, and assuming that you all have the same salary, the people around you at work are making more money than you do. Why? Because they participate in their 401(k).
Maybe you’ve been putting it off, thinking it is too complicated. Maybe you think you can’t afford to contribute to your retirement right now. Whatever the excuse, here are some things to consider that should encourage you to participate in your company’s plan today:
- You are giving yourself a raise. Most companies offer some kind of matching program to the funds you put in your account. The most common matching program gives employees 50% of whatever they contribute on the first 6% of their salary. For example, if you earn $50,000 and contribute 6% of your salary ($3,000), the company will contribute another $1,500 on top of that into your account. In most cases you get to keep the company’s portion after so many years of service. But what many people perhaps need to remember is that the $3,000 that you put into the 401(k) is always YOUR money, no matter what. Only the matched portion is lost if you leave before you become ‘vested,’ meaning the money then becomes yours.
- If you don’t pay yourself, you pay the IRS. One of the great things about a 401(k) is that your contributions are automatically tax deductible. That is, you don’t have to pay income tax, Medicare, Social Security or other payroll taxes on the money you contribute. To follow the same example from above, if you are not contributing to the 401(k), then you would have reported $50,000 in salary income to the IRS and paid tax on it. Had you contributed to the 401(k), your taxable salary is only $47,000. Assuming that you are in a 15% tax bracket, you saved $450 in taxes by reducing your taxable income. So not only are you saving for retirement, and not only is your employer chipping in, but the IRS is even helping. Your $3,000 contribution to retirement really only cost you $2,550 out of pocket.
- It’s easy. You don’t have to be a stock market wizard to participate in your 401(k). There are a variety of mutual funds called ‘lifestyle funds’ that do most of the work for you. Simply answer a few questions about your age and how risky you want your investments to be, and there is a fund for you. The best part of these funds is that they automatically adjust their investments as you get closer to retirement, moving from more risky to less risky investments. In theory, you would only need to buy one fund from your first job to your last day at the office.
So whether you are just starting a new job or have been at your job for a while, but haven’t participated in your 401(k) plan, get into the (retirement) game! We know money is tight for many right now, but putting away a little bit right now has the potential to reap big rewards in the future. Don’t miss out on this essential retirement planning opportunity.
Please note, that these are just few quick guidelines for participating in a 401(k) plan. There are so many elements associated with planning for retirement and determining how much money you are going to need when you decide to hang up your hat, that we have dedicated two complete chaptersabout in our book, The Financial Love Triangle: Yours, Mine & Ours, to the topic of retirement. So, if you want more information about 401(k) retirement plans and/or making sure that the goals of you and your spouse are in line when it comes to planning for retirement, we encourage you to check out Chapter 20: Planning for the Golden Years and Chapter 21: Computing Your Retirement Needs. There also is a retirement planning calculator on our Web site as well to help you manage the retirement planning game.
Good Luck and Happy Saving!
Larissa and Dan Kusel
Authors of The Financial Love Triangle
