Lessons I’ve Learned in Leadership and Life - Importance of Saving for Retirement
Importance of Saving for Retirement
Today I wanted to talk about a topic that I’m very passionate about and that is saving for your retirement.
I have been responsible for employee benefits at Fortune 500 companies in various industries for the past 20+ years and I wanted to share these tips that I have shared with employees that seems to help motivate them to save and better understand how these plans work.
I have had employees tell me, and I’m not talking about executive level employees who make lots of money, I’m talking about your average person, who because of consistently saving from day one , accumulated over $1 million dollars, so it is possible. They said it was because their manager or their parents encouraged them to sign up immediately and they were so glad they did.
#1 Pay yourself first !!
I saw a visual many years ago and it’s always stuck with me. I think it was Suze Orman, I really admire her and I think she gives great financial advice. She held up a dollar bill and said when you earn a dollar and then she ripped part of it off, you’re only taking home $.75. Now of course it depends on how much money you earn, the more you earn the more you’re taxed, but in general $.60-$.75 is what you’re taking home, but when you put a dollar in your 401(k) plan the whole dollar is going in there so you’re winning right off the bat.
I know a lot of people say that they don’t have the extra money , but start wherever you can even if it’s just one percent of your paycheck and then every time you get a raise increase your contribution to the 401(k) by as much as you can before you ever see it in your paycheck and start spending it, and eventually you’re gonna be contributing to the max.
Most companies will match you dollar for dollar up to a certain point, that is free money, if you’re not contributing to your 401(k) you’re missing out on that free money.
I know when you’re young and you’re just getting started, it feels like retirement is a lifetime away. Even in your mid-career, you’ve got kids in college and other financial obligations and it just seems like you don’t have the disposable income or immediate need to save , but believe me the time goes by fast and you won’t regret it.
#2 Don’t cash out when you leave your job
When you leave your job you may have the option to take your money out of the 401(k). I know that is tempting. I’ve done it myself. When I was in my 20’s and left my first real job I got a notice that I could have cash in my 401(k) if I wanted it. I took it, it was around $2000 and at the time, I felt like I hit the lottery. I was so excited to get that money , who knows what I did with it. I had no idea what the ramifications were and I never should’ve done it.
These plans are designed for you to keep the money in there and not touch it until you’re 59 1/2 so if you take it out earlier than that, you lose all the advantages of the plan , don’t take the money out when you leave your company.
You can keep it with the company or you can roll it over to an individual retirement account. Most organizations have a retirement plan committee and investment committee to ensure that you have good funds to pick from and reasonable fees so it’s a fine option to leave it there, but never cash out.
#3 Don’t borrow from your 401(k)
I know it seems like an appealing option… your refrigerator breaks down, you need a new car and you got this pile of money over here and what the heck it’s your money, you need it now, why not just take it. Well, if you leave your company and you have a loan, you have to pay it back sooner than later and if you don’t, it’s as if you defaulted on a loan, so not only are you gonna pay taxes on that, you’re also going to pay a penalty too.
#4 Don’t be intimidated by the investment options
I know it can be overwhelming, we are not financial planners so we don’t know everything there is to know about all of these investment options. Your company likely has a target date fund. Basically these funds are aligned with your age so if you’re young and just getting started, the target date fund is probably going to be more aggressive and elect funds where you can take more risk and you can manage the ups and downs of the market because you have more time to recover and then later on in your career it’ll probably align you with more conservative risk averse funds , so don’t be intimidated. You can set it and forget it with the target date fund.
#5 Name a beneficiary
The beneficiary is the person you want to have your money if you die. If you name one, you avoid probate and ensure your money goes where you intended. Make sure you update the beneficiary if your relationship changes. Believe me, over the years I have seen some horror stories where people elected a beneficiary, things changed , say they got divorced and forgot to change beneficiaries… guess who got their money … their ex wife.
I’m talking about traditional 401(k)’s , which are funded with pretax dollars. Many companies offer Roth 401(k)’s , they are funded with post tax income and withdrawals are not taxable. Depending on your situation one may be better for you than the other—regardless, just save for retirement!
I hope these tips were helpful.
Thank you so much for listening and Be Well!
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