The Simple Path to the Retirement of Your Dreams
The Simple Path to the Retirement of Your Dreams

The Simple Path to the Retirement of Your Dreams

 

By:

Michael R. McMorris
Michael R. McMorris
CPFA, QPA, QKA, NQPA

Retirement Plan Services Director
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The Simple Path to the Retirement of Your Dreams

How to take advantage of your company’s retirement plan.

Retirement saving is not rocket science.

Yet, you would think it must be given how many workers – in all industries and professions, and at all income levels – do not take the few simple steps to save and invest adequately for retirement. I was recently reminded of this while conducting a retirement saving and investing workshop for a client’s employees.

There are few expenses more important than your future retirement bill. Perhaps none bigger.

A 60-year-old new employee admitted she never enrolled in a previous employer’s plan because she was confused and felt overwhelmed. Nobody had taken the time to explain the company’s 401(k) plan in simple terms. After helping her complete the enrollment forms and select investments, she was relieved.

“I wish they explained it to me decades ago like you explained it to me today,” she said.

She wasn’t the only one who had an “aha” moment. Nearly all of the employees in the workshop, most of whom were new to the company, decided to enroll for the first time.

Are you one of the many Americans who feels overwhelmed about saving and confused about investing? Perhaps you believe it’s impossible to save regularly for retirement – even in small amounts – and still make ends meet? Are you not saving enough even though you admit that you could and understand its importance?

Beat the Retirement Savings Statistic

You’re not alone. A 2015 survey by GoBankingRates, which studied Americans’ biggest financial struggles, found that 56% of Americans have saved less than $10,000 for retirement. One out of three Americans report they have saved nothing for retirement.

Yet there are few expenses more important than your future retirement bill. Perhaps none bigger. Consider that you may need to cover the cost of living for 20-40 years after you stop working. Here’s the key: the sooner you start saving for that expense, the less you will have to save.

The good news is that you probably have access to the best tool for funding your retirement: an employer-sponsored plan. Approximately two-thirds of workers are offered a plan through their company, according to the 16th Annual Transamerica Retirement Survey. Saving in your company’s 401(k), 403(b) or similar plan is one of the easiest and best ways to make sure that your future self has adequate income in retirement.

The Benefits of Saving and Investing in a Company Plan

Here’s why you should take advantage of your company’s plan, even if it feels like a financial stretch:

  • It’s easy and you can start small. After spending a few minutes signing up, you will automatically save for your retirement every pay period without thinking about it — and without missing the money. Your employer takes care of the logistics. If necessary, you can start with a small contribution and gradually increase that savings rate over years.
  • Compounded investment growth. Since 1928, U.S. stocks have gained an average of more than 10% per year. Bonds have averaged returns of 5.4%. A typical globally diversified portfolio available through a 401(k) plan can provide gains that, when compounded over decades, may add thousands or even hundreds of thousands of dollars to your retirement account.
  • Free money. Your employer may help fund your retirement by matching all or a portion of the amount you contribute. Or they may make annual profit-sharing contributions. If your employer matches and you don’t enroll, you are leaving easy money on the table.
  • Lower taxes. By contributing to your 401(k) or other savings plan, you either decrease your income taxes now (by making ordinary “pre-tax” contributions) or decrease the taxes you’ll pay in retirement (by making “Roth” contributions).
  • More free money. If your income is less than $30,750 (if single) or combined income is less than $61,500 (if married), then the IRS will actually pay you to contribute to your plan. You can get up to $1,000 per year even if you owe no taxes that year. Simply complete Form 8880 when you file your tax return.
  • Purchasing power. Most retirement plans offer mutual funds for investment. All mutual fund companies charge a fee to the investor. The amount of the fee depends in part on the “share class” or type of mutual fund. Unless you have millions of dollars, you typically cannot get low-cost “institutional shares” or “retirement plan shares” on your own through a standard investment account; however, the large pool of money in your employer’s plan gives employees purchasing power, which can and should reduce the fees you pay by thousands of dollars over time. Your employer should provide you with an annual plan fee disclosure so you can compare costs to other investment vehicles.
  • Get investments at lower market prices. Investing consistently every pay period naturally gives you the advantage of dollar cost averaging. Compared to sporadic investing outside of your plan, regularly investing consistent dollar amounts lowers your average price per share: your dollar amount will buy more shares when prices are low and less shares when prices are high.
  • Stop at any time. If you run into a real financial mess, such as one created by a health crisis or a spouse’s unemployment, you can stop contributing at any time.
  • Your savings are portable. Most plans allow you to take your money upon termination and either cash it out or roll it over to another employer’s plan or an IRA. Many plans allow you to access your money while working if you reach a certain age (often 59 ½), have a qualified financial hardship, or need a loan. Check your plan’s Summary Plan Description to see what your plan allows.
  • Asset protection. Dollars held in an IRS-qualified plan like a 401(k) are automatically protected from creditors, including lawsuit settlements and bankruptcy claims. This gives you a higher level of protection than IRAs, bank accounts or most other investment vehicles.

The Path to Retirement is Simple, but the Journey is Long

Taking advantage of your employer-sponsored plan might feel like a frightening first step into new territory. But it’s a step worth taking—and your future self will thank you.

To help you take the first steps in taking advantage of your employer sponsored plan, use this checklist:

    Get on Track »


Tags:  401(k), Investing, IRA, Retirement, Retirement Planning, Retirement Savings, Saving, Tax Incentives

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.


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