By Haley Tolitsky, CFP
Enrolling in your employer’s retirement plan as soon as you become eligible is crucial. One of the biggest financial regrets that individuals have is waiting too long to start investing. The earlier you start saving for retirement, the more time your money has to grow. Workplace retirement plans are convenient because once you enroll, your work is done. Your contributions are deducted from each paycheck and invested for you. This saves time and energy to focus on your other financial and life goals.
Understand the money you contribute to this plan is for retirement. Do not expect to touch these funds until then, which is why it is so important to have an emergency fund of at least 3-6 months of living expenses. Keep in mind, you can continue to build your emergency fund and pay off debt while contributing to your retirement plan.
As soon as you become eligible, take the time to understand your plan options and get signed up! Here is a guide to get you started.
Determine the Type of Plan Offered
There are various types of retirement plans with different contribution limits, so understand what type of plan you are enrolling in and the maximum you can contribute each year. The most common plans and contributions for an individual under the age of 50 in 2021 are:
401(k), 403(b) or 427(b) Plan - $19,500 contribution limit
SIMPLE IRA - $13,500 contribution limit
Other plans, including Profit Sharing, SEP (Simplified Employee Pension) and Defined Benefit plans only allow for employer contributions.
Select a Contribution Amount and Type
Check the employer match that is offered, as this is essentially free money the company puts in your account if you contribute a specific percentage. For example, your employer may offer you a 4% match if you defer 5% each pay period. If you are paid weekly and make $1,000 before deductions and taxes, this would equal $50 from your paycheck each week and $40 from your employer that is invested for retirement. This may not seem like a lot in the short run, but really adds up over time.
Increase your contributions by at least 1-2% each year. Many plans have the option to automatically do this, which is called automatic escalation. Also, ask about your employer’s vesting schedule. You may have to work for the company for a specific number of years before the employer match is 100% yours.
Some plans will give you the option to select pre-tax vs. Roth (post-tax) contributions. If you select “pre-tax,” you don’t pay taxes now on the money you put in the plan but will have to do so when you take the money out at retirement. With Roth contributions, you pay income tax now instead of later, which allows for tax-free growth. The right selection depends on your current tax situation and if you think you will pay higher taxes now or at retirement.
Review your Investment Options
When it comes to investing, determine how much risk you are comfortable taking and how long until you reach age 59 ½ which is when you can touch these funds. Always review each fund’s expense ratio and be wary of funds with an expense ratio over 1%, as fees can diminish your returns over time.
Target date funds are an easy way to get started. You select the fund based on your desired retirement year and let the fund do the work for you. The closer you get to your retirement year, the more conservative the fund gets. You may also have the option to select a professionally designed investment portfolio based on your risk tolerance (aggressive to conservative) or the ability to select your own funds if you are a more seasoned investor.
Elect your Beneficiary
Designate a beneficiary that you would like to receive your funds in the plan if you were to pass away. Review your beneficiaries at least annually and with any major life changes to ensure your money is distributed based on your wishes.
A will does not override a beneficiary designation on a retirement plan, so always keep your beneficiaries up-to-date!
Consider Rolling Over Old Retirement Plan Dollars
If allowed by your plan, consider rolling any old retirement plans into your new one, which is a tax-free transfer. Consolidation can make your life much easier.
What if my employer doesn’t offer a retirement plan?
If your employer doesn’t offer a retirement plan or you want to contribute additional funds for retirement, consider opening a Traditional IRA or Roth IRA, which often have lower fees and more investment options. Remember, the most you can contribute in 2021 is $6,000 if you are under the age of 50, and Roth IRAs have income limits.
If you still have questions, reach out to your HR department and/or plan contact, as their job is to help you understand your options. The most important matter is to start investing now, so you can enjoy retirement and financial freedom later!
About the author: Haley Tolitsky, CFP®
Haley Tolitsky, CFP®, is a CERTIFIED FINANCIAL PLANNER™ with Cooke Capital in Wilmington, NC, providing highly personalized financial planning and investment management services. She is passionate about financial empowerment, specifically for women and the next generation, and loves the opportunity to motivate and guide others to take charge of their financial lives. Haley can be reached at firstname.lastname@example.org.
Financial advisory services offered through Acorn Financial Services, Inc. (AFAS), a Registered Investment Adviser. Securities offered through The Strategic Financial Alliance, Inc. (SFA), a registered Broker/Dealer. Haley Tolitsky is a Registered Representative of SFA and Investment Advisor Representative with AFAS. Cooke Capital is otherwise unaffiliated with AFAS and SFA. Supervising office (703) 293-3100.