Do you participate in your company’s 401(k) plan? If you do, are you contributing at least what your company will match? If you are not contributing at least what your company will match you are part of the thousands of workers who are leaving an estimated $24 billion on the table so to speak. Now we are not talking about a few dollars in the average plan’s account but rather almost $1,300 annually. And that will add up over a three or four-decade career. And that does not even begin to consider what you will also lose in earnings potential. What you are doing is cheating yourself out of hundreds of thousands of dollars over your entire working career.
While the participation rate of defined plans such as the 401(k) are at all-time highs, many employees are not taking full advantage of what the plan offers or even what their company offers. Many employers now will automatically enroll new employees in their 401(k) plan but at a rate that may be considered too low to achieve a comfortable retirement. Most companies default to three percent of an employee’s salary without taking any match into consideration. And considering most employers will match five to six percent anywhere from 50 to 100 percent that is where the $24 billion that is missed comes from.
Now many more companies have also started to increase gradually the default amount from three percent to ten percent or more depending on the firm’s strategy. While an employee can save up to $18,000 for 2015 most people do not approach those kinds of savings, at least when they are first starting their career. As most financial planners recommend you save at least ten percent of your salary prior to any matching this does make some sound advice and it is really a service to the firm’s employees to have the automatic enrollment and then increases in contributions.
Now not all 401(k) plans are created equally and I do not recommend you stash ten percent of your salary in the plan just to save for retirement when there are other alternatives that also need to be considered. First, if your plan has enough investment options and low fees it may make sense to save more through the 401(k) plan. But if like many plans these options are poor investment choices, or they have high fees I recommend saving up to the point where the company maximizes the match. Then I would recommend saving in a ROTH IRA or a Traditional IRA if you make too much to contribute to a ROTH and then do an immediate conversion of the IRA. For more information on IRA’s contact me or look at some of my earlier posts on this website but it is also a good idea to consult a financial planner when doing these types of transactions. After you have maxed out the IRA, we have a few options. One is to save in a brokerage account for the long-term and not trade. Yes, you will pay taxes on the dividend but they will be lower than being taxed in the IRA or 401(k) as they are not considered ordinary income. Also, you will pay the lower long-term capital gains tax on the profits once you do sell provided you have kept the security at least a year. If you do not want to opt for the brokerage account, you can always switch back to the employer’s 401(k) plan after you maximize your IRA for the year.
While 401(k) plans are sometimes the easiest way to save for retirement they are not always the best choice depending on your company’s plan. Do your homework and see what the best fit is for you and your financial investment strategy. In this post I have given you an idea of how you can save not only through a 401(k) plan to never leave free money on the table but also given you a brief look at two other options available to most everyone. I strongly recommend saving as much as you can as early as you can to let compound interest work in your favor. If you do not believe me that an extra five years will make an enormous difference run the numbers for yourself in Excel’s Future Value formula. I guarantee it will amaze you what a few extra years can do to the bottom line.
If you have any questions or need any additional information feel free to contact me.
