You’re busy. Finishing school or entering the workforce, you have a lot going on. So many balls in the air: getting your career started, renting an apartment or buying a house, making new connections at work and maintaining your friendships. And it’s not just your time, all those things require juggling your finances as well. So it’s understandable that thinking about saving for retirement might not be at the top of your current to-do list. But getting started on your lifelong savings journey is important—even now, because the earlier you start the more money and flexibility you will have when you do retire.
Getting started can be easy, neither complicated nor time-consuming. You don’t need to be a financial expert; you don’t need to understand why the stock market rises and falls; you don’t need to cut back on expenses or sacrifice your lifestyle. You simply need to take advantage of your employer’s 401(k) plan.
Start small
You can start small, just contributing enough to your 401(k) to take advantage of your employer’s match, which is typically about 3 percent of your income. Once you enroll in the plan, you’re in “automatic 401(k) mode”; withdrawals are automatically made from your paycheck each month. Your savings grow, compounding over time, and as your career moves along and your earnings increase, you can increase your monthly contribution.
Your savings will be put into investments selected by your employer in cooperation with the plan administrator to be appropriate for your age and projected retirement timeline. Both have fiduciary responsibility, meaning your money must be invested wisely. You can choose from that list of investments, or take the plan’s default investment selection, again based on what’s appropriate for your age and projected retirement date.
Traditional vs. Roth
There are two kinds of employer-provided 401(k) plans. Your employer might offer only a traditional plan, but increasingly employers are offering a choice between a traditional and Roth plan. If you enroll in a traditional plan, your contributions are made pre-tax, that is, you pay no tax on that income (which also serves to reduce your current taxable income). If you enroll in a Roth plan, your contributions are after-tax, that is, taxable just like your other income. The advantage of the Roth is that your savings plus your earnings over the years from interest and the investments in your 401(k) are yours tax-free when you start your withdrawals in retirement (a huge win if a Roth is available).
Traditional or Roth, you can begin withdrawing money at age 59.5 under current regulations. Anytime earlier, with some exceptions, your withdrawals will be reduced by a 10 percent penalty plus tax.
Key takeaways
A few key points about saving for your future:
- Start early to take advantage of years of compound growth. You can use an online calculator to see how your savings will grow.
- Saving for your future is effortless, your plan contributions come right out of your paycheck.
- Contribute enough to take advantage of your employer match. By doing so, you instantly double your savings.
- Consider a Roth plan, if available, because your earnings grow tax-free.
- Check your account and investment selections every year, and increase your contribution amount as your earnings grow over time.
- Withdrawals before age 59.5 come with a 10 percent penalty, so make sure the money you’re putting away is designated for your retirement.
- And finally, feel good about knowing that when the time comes to start withdrawing funds, you can use them for anything you like, from paying expenses to travelling to buying a second home.
The bottom line: If your employer offers a 401(k) plan, take advantage of it. A traditional or Roth 401(k) is your easiest and most powerful tool for building wealth.
We’re here to help. If you have questions about starting your retirement savings plan, call me 814-836-5776, or email me at ggallagher@hbkswealth.com.
Important Disclosure:
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
Investment Advisory Services offered through HBK Sorce Advisory LLC, d.b.a. HBKS Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured By Any State or Federal Agency.
