Posted: Sep. 10, 2017 12:01 am
Many workers today, especially those who work for large corporations and government agencies, are eligible to participate in a tax-deferred retirement savings plan.
Available options include 401(k) plans for corporate workers; 403(b) plans for employees of K-12 schools, colleges and universities, and non-profit organizations; 457 plans for state and local government workers; and the Thrift Savings Plan (TSP) for federal government workers and service members. These plans are sometimes referred to as “salary reduction plans” because workers voluntarily reduce their gross income by the amount that they designate for retirement savings.
At some workplaces, employees are automatically enrolled in a tax-deferred plan when they are hired, unless they specifically fill out paperwork to opt out. Employers select a default contribution amount (e.g., 3 percent of a worker’s pay) and investments (e.g., target date mutual funds).
At other workplaces, it is up to individual workers to decide if they want to make plan contributions and, if so, how much (e.g., 5 percent of gross income), and to what investment accounts (e.g., stock fund, bond fund, etc.). The maximum amount that can be saved is set annually by the IRS (in 2017, $18,000 for workers under age 50 and $24,000 for those age 50 and up).
Below are seven smart strategies for workers with tax-deferred employer retirement savings plans:
Make a Match: An employer match is “free money” that should not be passed up. Unfortunately, many workers do. A 2015 study found that employees collectively miss out on $24 billion in employer matches. The average employee leaves $1,336 “on the table” each year. Not only do employees lose additional savings by their employer, but they also forgo the additional return that they could earn on match that they did not receive.
Increase Savings Annually: Ideally, workers should save the maximum amount allowed annually by tax law. Realistically, many people can’t afford to do this. A good work-around is to increase your retirement plan savings by 10 percent (or more) each year.
For example, if you save $3,000 this year, you would save $3,300 next year. After 10 years, you will have doubled your contribution: 10 percent increase x 10 years — 100 percent).
Review Beneficiary Designations: Change the beneficiary of your retirement plan assets ASAP if the person that you named dies and you have not named an alternative (i.e., contingent beneficiary). Decide who (i.e., people or organizations) you want the money in your account to go to after you are no longer alive. Life events that affect retirement plan documents include death, disability, marriage, divorce, retirement plan changes (e.g., new company management), and changes in employment.
Understand Target Date Fund Choices: Many employers offer target date mutual funds as a retirement plan investment option. These funds have a future date (e.g., 2050) in their title and automatically become more conservative (i.e., less stock in the fund portfolio) over time.
All target date funds with the same date are not the same, however. They may have different percentages of stock, bonds, and cash assets before and after the target date. It is important for investors to fully understand the asset allocation so they know what they are buying.
Focus on the Long Term: It is human nature for investors to want to sell investments in stock during market downturns and to try to “time the market.” Successful investors resist that urge and focus on long-term results. Buying stock when share prices are down is like going to a department store’s “one-day sale” and getting more (shares) for your money. Retirement plan deposits are made automatically regardless of market movements.
Reduce Portfolio Expenses: Seemingly “small” fees (e.g., plan administration fees, individual service fees, and the expense ratio on mutual funds) add up over time. Review retirement plan documents carefully, especially fund expense ratios; i.e., fees as a percentage of fund assets).
Lower is better (e.g., 0.5 percent vs. 1.3 percent). Consider low-cost index funds if they are an available option and lobby your employer for low-cost choices, if needed.
Move Your Money: While workers may be able to leave their retirement plan savings with a former employer, it is often not the best strategy. Rather, they’ll have a larger selection of investment choices in a rollover IRA with an investment company. In addition, they won’t have to contact a former employer’s HR office years (or decades) down the road. Another option is moving retirement savings to a new employer’s plan, if allowed.
Many people think you need a lot of money to save for retirement. This simply is not true. With a tax-deferred employer plan, you can often start with as little as 1 percent of your pay.
If you’re already investing, invest more. The best time to do this is when your income increases or a household expense, like child care, ends.
Barbara O’Neill, an Andover Township resident, is Extension Specialist in Financial Resource Management for Rutgers Cooperative Extension. She can be reached at 848-932-9126 or firstname.lastname@example.org. She also tweets daily financial education messages on Twitter at http://twitter.com/moneytalk1.
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