Retirement security – or more precisely, preparing so that you do have retirement security – is a year-long activity, of course. But this week is devoted to making employees more aware of how critical it is to save now for their financial future, promoting the benefits of getting started saving for retirement today, and encouraging employees to take full advantage of their employer-sponsored plans by increasing their contributions.
So, for those looking to shore up your own retirement security – or those you may work with – here are some things to keep in mind.
Don’t default to the plan default.
While most education materials provided with your 401(k) emphasize the benefit of the employer match (generally referencing that you don’t want to leave “free money” on the table), a growing number try to make it easier for you by automatically enrolling you in the plan. That’s the good news.
The bad news? That default savings rate (generally 3%) will almost certainly be less than you need to save to get the full employer match (see above). And it will almost certainly be less than you need to achieve your retirement goals/needs. So, if you do take advantage of the convenience of the default, make sure that you remember to make the change to the savings rate at the first opportunity.
You should save to at least the level of the employer match.
Many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. That match is often referred to as “free money” because you get it just for saving for retirement. That match is not actually “free” of course – but it is free for you. If it’s 25 cents for every dollar you save, it’s like getting a 25% return on your investment.
You can save more than the match.
A lot of people save only as much as they need to receive the full employer match. As noted above, while that’s certainly a good starting point, it may not be the right amount for you. There are a number of factors that go into determining the amount and level of the match – however, the amount you need to set aside for your own personal retirement goals is almost certainly not one of those factors. You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.
Older workers can save (even) more.
Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make annual “catch-up” contributions. In 2018, up to $6,000 in catch-up contributions may be allowed by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs as well, but the limits are much smaller).
The bottom line: If you haven’t saved enough over your working career, these catch-up provisions can help you… well, “catch up.” You can find out more here.
You can save for retirement even if you don’t have a plan at work.
Discussions about the retirement coverage “gap” often focus on the number of workers who don’t have access to a retirement plan at work (though the oft-repeated notion that “more than 50%” of workers who ostensibly don’t is a bit exaggerated). Not having a plan at work can be a hindrance to saving – there’s no employer match, ease of payroll deduction, or workplace education and access to advisors, for starters. And data suggests that workers are significantly more likely to save if they have the opportunity to do so via a workplace retirement plan like a 401(k) – 12 times more likely, in fact.
All in all, when it comes to building retirement security, there’s little question that saving for retirement at work is the way to go – there are tax advantages, the support of the employer matching contributions, and access to investment choices that are screened and reviewed on a regular basis by the plan fiduciaries.
But you can save for retirement on your own – open an IRA at your local bank or financial institution. And you can probably set it up for regular payroll deduction at work as well. It’s not as convenient as having a plan at work, but it can be done.
Don’t forget that while the steps above provide a way to achieve retirement security, saving for retirement without some idea of how much you’ll actually need for retirement is like heading out on a long trip with a broken fuel tank gauge. Take the time this week to do a retirement needs calculation. It doesn’t have to take long or be complicated. If you have a retirement plan at work, there’s probably a calculator available for that purpose – or you can check out the BallparkE$timate® online at www.choosetosave.org.
It’ll be good for your peace of mind – will likely improve your retirement security prospects and confidence – and, who knows – you might even enjoy it.
- Nevin E. Adams, JD
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