Let’s Talk Money

Retirement planning starts long before you say “Adios, peeps!” to your boss and co-workers.  It starts day one of your first job. You’re probably curling up half your top lip, looking at your screen sideways and saying “what?”.

Think about it. Most of us started our working career at a fast food restaurant or retail store in the Mall, right?  Well, you probably had a conversation with your new manager about your hourly wage, schedule, lunch break, and discounts on the products you were selling.  They even told you about this thing called a 401(k)-retirement savings plan that you could put in a percentage of your earnings and the company would match up to 3 or 5 percent.  Do you remember that part of the conversation? Did you take them up on this offer?  Of course not!  You were 16 years old and you only got the job to buy new trendy clothes or your first shiny new-to-you car.  Saving money meant little more than having enough to buy what you wanted—usually the things your parents wouldn’t buy for you.

But what would have happened if you leaned in and listened to that part of the conversation. What if you did take them up on the offer?  Where would you be now?

I, like you, didn’t tune my ears to that part of the conversation until I was a bit older and got my first “real” job where I was making “real” money. The idea that if I put 3% (or more) of every paycheck, and my employer matched up to 3%, in this thing called a 401(k), I’d someday have enough money to live on when I decided to retire?  It sounded too good to be true, and sadly, in some cases, it is.

Future Money in a 401(k) Plan

Well, you may have started making contributions into the 401(k) thing a little late, but whenever you start, it’s a good time to start.  This is future money.  This is “don’t touch” money. This money is for you to use when you retire from your job and really start living.

However, if you have a hardship and must withdraw or “borrow” money from your 401(k) before the magical age of 59 ½, it could cost you a 10% early withdrawal penalty.  Also, the money will be considered income and you will pay income tax on it in the year you make the withdrawal.  So, I reiterate, this future money is “don’t touch” money unless you have a dire emergency. Just remember, if you withdraw the money before that magical age and don’t pay it back to your 401(k), Uncle Sam will take his cut.

Benefits of 401(k) Plan

Let’s say that you have started saving future money, here are some benefits of investing in a 401(k)-retirement savings plan:

1. Your money grow tax deferred which means that you won’t be taxed until you withdraw it—Uncle Sam can’t touch it (until you withdraw it)
2. Your money grows tax free because the dividends and interest income you earn is not taxed if it stays in your 401(k) plan
3. Your money can grow more quickly because it compounds which means your money is earning money through interest and dividends
4. Your contribution is not federally taxed because the money is deducted from your pre-taxed earnings (earnings before taxes are deducted) reducing your taxable income and possibly putting you in a lower tax bracket
5. Your employer may contribute a percentage of your contribution (ask your human resources or payroll administrator about the employer matching program)
6. Your employer’s contribution is not considered income as it goes into your 401(k) plan–this is free money!
7. You can contribute up to $19,500 annually if you are age 49 and under, or up to $26,000 annually if you are age 50 or over

401(k) Plan Allocations

Most 401(k) plans are a combination of cash, mutual funds, stocks, and bonds investments.  You should have received information about the plan and the array of investments within it.  Make sure you read it carefully so you’ll know what you can and cannot do with your plan, especially how, or if, you can choose which type of investments you want in your 401(k) savings plan.

When you are ready, and if the plan allows, you can choose to have a percentage of your money in the different types of investments (for example:  15% stocks, 25% mutual funds, 30% bonds, and 30% cash) or you can choose to have 100% of just one type.  One important thing to consider is your risk tolerance when making your investment decisions.  Generally, when you are in your 20’s and 30’s, you can withstand more risky investment options because you have more time to build your savings and ride out the fluctuations of financial markets.  But, when you are older and closer to retirement, your recovery time during a fluctuating market is shortened and you may not want to risk losing too much of your future money.  Bonds and cash savings would be considered low risk, while mutual funds and stocks are higher risk—stocks being the highest risk of them all.

Getting Started with Your 401(k)

This basic information can help you start saving your future money in a 401(k)-retirement savings plan.  For more information about whether your employer offers this type of savings opportunity, talk to your human resources manager or payroll administrator. If there is one available, be sure to get a copy of the plan administration information to understand the ins and outs of it and read it carefully.  Once you get started, you’re on your way to saving future money towards your retirement.  And, before you know it, you’ll be calling in “Retired!”.