Your grandparents—and even some of your parents—had it pretty easy when it came to saving for retirement. Back then, not only was Social Security a reliable source of retirement income but many employers offered Mom or Dad a defined benefit pension plan as well.
It was a nice company perk, primarily funded by the employer, which promised to pay retirees a steady “paycheck” for the rest of their lives.
Today, about half of Americans younger than 50 believe they will receive no Social Security benefits by the time they retire.1 In addition, fewer companies offer employer-funded pension plans these days. Instead, employers are more likely to offer 401(k) or 403(b) plans as a way to help employees save money for the future. Some companies may offer auto-enrollment — meaning you have to opt out if you don’t want to participate. Others may require you to proactively sign up for the plan.
Either way, your mission is clear: Participate in your employer’s 401(k) or 403(b) plan as soon as your company allows—and stay the course. Your future comfort and security rests almost solely on your ability to save during your working years.
You Are in Charge
Conventional wisdom says you should aim to replace 65% to 90% of your current income to maintain your lifestyle once you retire. For example, if you make $50,000 per year today, you may need anywhere from $32,500 to $45,000 (in today’s dollars) to make ends meet in retirement. Keep in mind that Social Security may not be enough, as it may only replace about 40% of your current income.
To augment your Social Security benefits, there is no getting around saving aggressively throughout your working years. That’s where your 401(k) or 403(b) comes into play. It allows you to invest for your future, while taking advantage of the income tax savings, employer match and long-term compounded growth of your wealth.
Let’s take a look at all three of these important benefits.
Whatever you do, avoid touching your 401(k) or 403(b) money before you reach retirement age, unless you are facing an extreme emergency. Not only will withdrawing money from your retirement account impact your chances of having a comfortable retirement, you’ll have to pay substantial penalties and taxes as well. If you change jobs, either keep the money in your current 401(k) or 403(b), roll it over into your new plan or roll it over into an IRA.
Beware of the Cash Trap
Despite these hard-to-pass-up benefits of 401(k) and 403(b) plans, some workers tend to fear investing in stocks, often because they lack confidence in their investment know-how. If you decide to “play it safe” and keep your money in savings accounts, money market accounts and certificates of deposit (CDs), you may miss out on the significant capital appreciation historically provided by stocks and bonds.
While short-term investments play an important role in your overall financial strategy, they aren’t designed to grow your wealth over time. Your money likely won’t keep up with inflation when it is sitting in cash. By recognizing and overcoming your financial insecurity, you can avoid the problem of investing too conservatively.
One Final Note
If you can afford to “max out” your 401(k) or 403(b) contributions, do it. For example, the maximum amount you can put into a 401(k) in 2022 is $20,500. If you are age 50 or older, you can contribute an additional $6,500. With time on your side, the “freebie” employer match and tax benefits, investing in your 401(k) matters a lot. You don’t want to miss out on your chance to get that steady paycheck in your retirement years—just like your grandparents.
Jemma Financial is here to help with all your investment needs. Whether by phone, video, or email, we can answer your questions and help you with your long-term financial goals.
1. “Looking to the Future, Public Sees an American in Decline on Many Fronts,” Pew Research Center, 3/21/19.
Need assistance? Call 855.662.2121 or email info@jemmafinancial.com
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