As young adults, 20 and 30-year-old’s tend to procrastinate when it comes to saving for retirement, thinking they have all the time in the world.But the key is to start now. When it comes to saving for retirement, there are few better ways than a workplace plan such as a 401(K). Yet, there are a few common excuses for not opting into an employer compensation plan.
● There will always be Social Security
● I can’t afford it right now. I’m not making enough money to save yet.
● Fear of losing money in bad investments.
● I’m so young, I have all the time in the world.
The 411 about the 401(K)
A 401K allows employees to withdraw money from their paycheck prior to taxes and invest it in a retirement savings plan. Many employers then match the contributions proportionately, sometimes even dollar for dollar. The contributions are not taxed until the money is withdrawn. As of 2014, you can contribute up to $17,500 per year.
Funds withdrawn prior to age 59 ½ are subject to a 10% penalty and are taxed as current income in the year withdrawn.
A Mini History Lesson about Pensions and Employer Compensation Plans
It was during the American Revolution, that what we know as a pension, came about. The Continental Congress offered soldiers a monthly lifetime income as an incentive to join General Washington’s army.The income they’d receive when the war was over would be a payment for their service.This lifetime income was called a pension.The offer was repeated by the federal government the during the Civil War and has continued ever since.
The first private company to offer a pension plan was American Express in 1875. They gave an income to each retired employee. The amount was equal to half of the worker’s annual pay, based on an average of the worker’s final ten years of employment (up to $500 annually). Over the next 50 years, hundreds of other companies created similar plans. (However, now it’s based on the average of the worker’s highest paid income of 35 years!)
The end of 1929 brought the Great Depression. Millions of people became unemployed which created fierce competition for jobs.The nation’s economy at the time was agricultural and industrial— both very physically demanding— placing older Americans at a distinct disadvantage. So when older employees lost their jobs, they were unlikely to find new ones and found themselves involuntarily retired.
Thus, in 1935 came the Social Security Act which was signed by President Roosevelt,establishing the first public retirement plan and a national retirement age of 65.Similar to the private plan created by American Express, Social Security was to pay monthly benefits based on each worker’s length of service and average annual salary.
Addressing the Excuses
There will always be Social Security
When the Social Security Act was established, the average American lifespan was 61.7 years, however, today it is 78 years. Now, one must plan income for retirement to get you to age 100 or beyond. You can no longer solely rely on Social Security alone to maintain you through your retirement years. It should only provide you with one-third of your retirement income.
Few companies still maintain traditional pensions (paid for by employers). In this day and age, people are no longer staying at one place of employment for their entire career which is usually the case in which a pension would still exist. The vast majority of today’s retirement plans fall under “defined contribution plans” such as the 401(K).
I can’t afford it right now. I’m not making enough money to save yet.
You do not have to make a lot of money to participate in this program. Typically an employer only requires 1-2% of the participant’s salary. On a $50K salary, that is only $42 to $84 per month. And remember, your employer may contribute proportionately every time you do. How much do you spend on your cable bill? Or phone bill? Or your gym?
Your employer automatically deducts your contributions every time you are paid. If you don’t see the money, it won’t be so hard to part with it! Most of the legwork to provide investment options is done by your employer and the professional advisers they hire to assist them. An increasing number of plans offer “auto enroll” and “auto escalate” features. The first automatically signs you up for your retirement plan; the second automatically boosts contributions as your salary increases.
Another perk: You get two tax advantages when you save in a 401(K) plan. First, your contributions are tax-deductible. Second, the money you contribute doesn’t count toward your gross income for the year, lowering your taxable income. There are also no taxes on interest or dividends at the end of the year like in a non qualified investment or savings. Say you put 10% of your $50,000 salary into your account each month. That’s $416 you don’t have to pay tax on. If you’re single, that translates to about $104 in monthly tax savings, or $1,245 a year and tax deferred until its withdrawn.
Fear of losing money in bad investments.
Sometimes taking your hard earned money and putting it where you can’t see it is scary. People who have fear of going to the doctor but have to go anyway. Think of it the same way. Most 401(k)s let the employee choose where to invest their savings from a variety of options ranging from aggressive choices as to less volatile choices.
I’m so young, I have all the time in the world.
The key to success of a 401(K) is to start as early as possible and to try and contribute the maximum allowed. According to FinancialSamurai.com, in 2014, if a 22 year old started participating in a 401(K) by the time they are 65, they will have saved $743K to $3.5 million, depending on the percentage of contributions to the plan. But if someone does not start contributing until age 40, by the time they are 65, they will have saved $305.5K to $550K, depending on the percentage of contributions to the plan. Wouldn’t you prefer to be the former?
Don’t leave money on the table. If your company offers a 401(K), find out the details of the plan and consider taking advantage today.
Learn more about our Retirement Planning services.