Customer – “I have no savings, a mountain of bills but I want to retire as soon possible. Can you still help me plan for retirement?”
Financial Professional – “Absolutely! I can create a successful retirement plan regardless of your financial situation. We just need to schedule your death for later this month. How does next Tuesday work for you?”
Not that long ago, working for a company in the private sector for 30 or 40 years was not uncommon – people didn’t job hop. Often times this meant when you retired after decades of loyal service not only did you get an awesome party complete with cake and ice cream but you also received a pension. Guaranteed retirement income provided by your employer for the rest of your life. Bust out the confetti! In fact, in the 1980s nearly half of all private sector companies in the U.S. still offered a pension for their employees. Marry that with your social security benefits and sprinkle a little personal savings on top and you’ve got what the financial industry refers to as the “3-Legged Stool” for retirement. A solid stool equals a solid retirement plan.
Fast forward to today.
Today less than 16% of U.S. companies now offer pensions for their employees. Social Security keeps pushing back the full retirement age goal post; delaying when people can receive full benefits. And according to bankrate.com, the average U.S. bank account has a balance of $41,600. If we’re using the old analogy for retirement planning, the 3-Legged Stool (pension + savings + social security = retirement income), then we’ve got ourselves one seriously wobbly stool.
This is why saving for retirement has become a major talking point for most Americans. The old rule doesn’t work anymore. With longer life expectancies, growing healthcare costs, rising nursing home expenses and overall inflation it would be foolish to depend on the government or a company to meet our financial needs if you want to stop working and still maintain your current standard of living. Saving for retirement is YOUR responsibility and no one else’s. Here’s one way to get started.
One of the simplest ways to save for retirement is to participate in your company’s retirement plan. There are several types of plans that may be offered to employees, and while this article will focus on the 401(k) plan, regardless of the plan type being offered if there is an opportunity for you to start saving – do it today.
The 401(k) plan is a way to reduce taxable income for participants while allowing for tax deferred growth*. Let’s say your annual salary is $50,000 and you contribute 5% of your earnings to your 401(k) plan. $2,500 is set aside and subtracted from your income and now you only pay income tax on $47,500. In addition to that gem, the $2,500 has the potential to grow through investment gains, dividends or interest depending on the underlying investments*. Also, you don’t pay taxes on this bucket of money until you take the funds out of your 401(k) and put it in your pocket. Lower taxable income, no taxes as the money grows and all of this happens automatically every pay period.
Another feature some plans offer is the employer match. With the match your employer is literally giving you money. FREE. MONEY. Let’s say your employer has a 5% match for eligible employees. That means up to 5% they will match 100% of your contributions. Let’s go back to our earlier example of contributing $2,500. If you contribute $2,500 to your 401(k) not only do you still get the tax deduction on your income taxes, and tax-deferred growth* but now you also get an additional $2,500 added to your 401(k) plan that is now working for you! Double your contribution just like that! Now lets say you’re extra sweet to yourself and contribute 6% of your earnings to your 401(k) plan ($3,000); your employer will match 5% since that is the max. Not all employers offer a match but if they do I cannot stress enough how important it is for you to participate in the 401(k) even more! There also may be some eligibility requirements and restrictions that apply to the match amount so talk to your HR department to fully understand what those rules are and how they affect your situation.
Questions to ask your HR department or Plan Administrator?
- Do you offer a 401(k) plan (or any other retirement plan)?
- Am I eligible to participate, and if not, when will I be eligible?
- Do you offer an employer match, and if so, how much?
- What is the “vesting schedule**” for this plan?
- What are the investment options for this plan?
- Is there a designated person or department I can talk to about which investments would be suitable for me? (If not, find an investment professional near you for advice.)
Over my years in the industry I’ve heard just about every excuse as to why someone can’t save for their retirement.
- I can’t afford it.
- I have to pay for my children’s college.
- I don’t understand investments.
- It’s too risky.
- There’s too much paperwork.
- I’m not healthy, I’ll probably die before I retire.
- I’m going to work until I’m dead.
Excuse. Excuse. Excuse. And some of these are very good excuses. It’s true, you might get plowed into by a bus tomorrow, but any way you exit this big blue planet I don’t think your last thought is going to be, “Darn it!! I never should have participated in that 401(k) plan!”
Don’t be foolish. Saving isn’t just about having a nest egg at some point in the distant future. Saving for retirement is for today. The satisfaction of building something for yourself and your family gives you peace of mind, security and empowerment — TODAY. You can afford it. Period. Suffer a little penny pinching now on your own terms or you can suffer a lot of pain down the road on someone else’s terms.
*Please Note, Securities: are NOT Deposits, are NOT FDIC Insured, are NOT Insured by any Government Agency, are NOT Guaranteed by the Bank, are Subject to Risk, are Subject to Possible Loss of Principal. This does not include federal insurance programs such as Federal Crop Insurance.
**Vesting schedule is a way of encouraging employees to stick around. Companies may retain ownership of a portion of the match depending on how long someone has been employed. Every company is different so check with your HR department for more information.