Outside of relying on social security income, employer sponsored retirement plans, like 401(k)'s, are likely to be the largest source of retirement income later in life for most Americans.
Given we spend so much of our time working it makes sense to make the most of this company benefit. Below are a few things you should consider when saving to your company's plan to make sure you are making the most of it.
If you have access to a plan at all, consider yourself lucky.
“According to a 2011 survey by Economic Policy Research, 68% of the working age population (25-64) in the U.S. did not participate in an employer-sponsored retirement plan because their employer did not offer one.”
Step #1: Determine when you are eligible to participate in the plan
For administrative reasons there is usually a waiting period before you can participate in the plan. We find that often times these waiting periods are about 90 days but vary from company to company. Check with your company's HR Department if you don't already know when you are eligible.
Whatever you do, don't forget about the plan!
You will need to take action to enroll after you meet the eligibility requirements, which can be some time after you initial on-boarding as a new employee. This waiting period delay can be perfect and unfortunate trap for forgetting about the plan altogether. Set an alert on your phone or do something to help yourself remember.
Step #2: Enroll in the plan as soon as possible
You should not delay. The biggest hold-up we hear is that the employee needs to check with their spouse. Remember, while their opinion is important, the more barriers you build to getting in, the less likely it is you will actually take the steps to enroll. Often times we hear stories of how the spouse talked the participant out of saving because they did not trust the stock market (of course their sources are generally mainstream news outlets).
No offense to your spouse but this is horrible advice. Everyone should participate in an employer sponsored retirement plan. How you invest is up to you, but participate nonetheless.
So that you can take action as soon as possible, consider instead, enrolling at some small amount as soon as possible, and then if it takes months to determine a more appropriate savings rate (after speaking with your spouse) that can be adjusted down the road.
Step #3: Save at least enough to get the "free money"
Know if your employer matches your contributions and take full advantage of this partnership.
Each company is different in their compensation practices, but many companies build in the match that they provide as part of your compensation package. When you don't take advantage of this, it is only you who is losing out. This is money that is in many cases earmarked for you to receive, if you are diligent enough to claim it.
Common matches that we have seen among companies include the following:
- Dollar for dollar match up to 4% of employee salary
- 25 cents on the dollar match up to 15% of employee salary
Whatever your company is willing to match, at least do that.
Step #4: Don't be afraid to invest in the stock market
You would not believe how many discussions we have with participants that say they want to take no risk at all with their money. The problem is, even when you don't feel like you're taking risk, you still are.
The risk you are taking is inflation risk (purchasing power risk). While remaining conservative in this way may satisfy your short term fears of volatility and loss, it can be devastating to the long term value of your money and what it can actually purchase in your retirement.
The bottom line is, you need this money to grow. Stocks have historically been a good way to make that happen. While the future may not be like the past, there's a decent chance that stocks (over the long run) will still provide better returns that sitting on your cash.
And another thing, if you are making investment decisions based on your nightly routine of watching mainstream media, stop doing that. If mainstream news outlets were remotely good at predicting stock market behavior they would be investors, not new outlets. Remember, they are there to sell fear. That's how they make money. What happens today or this week or this month is likely irrelevant in terms of what in many cases is a multi-decade period of saving and investing. Remember you are investing for the long run.
We understand that each person is different, but seek out a qualified investment professional so that you can learn the pros and cons of doing what your emotions may tell you to do versus what you should be doing from an investment perspective.
Step #5: Don't stop there - figure out what it is you really need to save
Most participants don't know that unless the plan states otherwise (which usually they don't) you can contribute up to the IRS maximums each year regardless of what the employer does or does not match.
As for 2016 this amount is $18,000 and if you obtain age 50 or older you can also contribute what is called a catch-up contribution. This amount as of 2016 was $6,000. This means that for someone turning 50 or older you can save a total of $24,000 each year, and that excludes the employer match! The match money is extra.
TIP: Most enrollment forms ask for a % savings rate rather than a hard dollar amount (like $18,000). If you are trying to maximize your savings, simply take the amount you want to save in dollar and divide by your salary (i.e. $18,000 / $60,000 = 30%). In that example, your savings rate would be 30%.
Figuring out your magic number for savings requires quite a number of assumptions. Working with numerous plans and participants over the years, something we can say with confidence is that it is rarely the case that anyone is saving enough, so if you are reading this and contemplating a change, chances are you do need to be saving more.
Some free retirement calculators can be found at http://dinkytown.com/retirement.html or feel free to drop us an email with some particulars about your situation and we would be happy to discuss your savings questions and help lead you in a more informed course of action.
Summary To-Do Checklist:
Determine your plan eligibility date
Enroll in the plan as soon as eligible
Save enough to maximize the employer match (if available)
Invest appropriately for your time horizon
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.