Whether you just got a new job (congrats!) or you have been working for your company for a couple years, you need to be aware of certain details around your retirement plan. I regularly work with employees enrolled in the plans we advise. Here are the key takeaways I want all employees and plan participants to know:
1. Don’t Be Afraid to Ask Questions
If you’re starting a new job, ask questions about the retirement plan. These are the most important questions to ask your employer:
- When am I eligible to enroll to start saving?
- Are there employer contributions?
- If so, how much is the employer contribution? Is it a match? When is the employer contribution deposited?
There is typically an eligibility requirement and enrollment period for retirement plans. For example, you may become eligible after six months of employment and be able to enroll in the plan monthly, quarterly or semi-annually. As soon as you are eligible to enroll, you should! When you enroll, your contribution will be deducted from your paycheck and deposited to your account in the plan as soon as administratively possible.
Also, to encourage retirement savings, some employers make contributions to their employees’ accounts. The timing and amount your employer contributes depends completely on the plan. Some employers deposit a certain amount with each payroll while others submit the employer contribution quarterly or annually. Also, the amount your employer could contribute depends on the plan design and contribution formulas.
2. Don’t Leave Money on the Table
Be sure you are deferring enough from your paycheck to get the full employer match if one is offered.
Employer contributions can vary widely which is why it is so important to understand your plan (see first section). For example, if your employer matches dollar-for-dollar up to 3% of compensation plus 50 cents on the dollar for the next 2% of compensation deferred, be sure you are deferring at least 5% from your paycheck to get the full 4% employer match.
Other plans have a Safe Harbor Non-Elective Plan design which requires your employer to contribute 3% of compensation into your account regardless of what you contribute.
When deciding how much you plan to save, be sure you fully understand the employer contributions you are eligible to receive and take full advantage of the ‘money on the table’ whenever possible!
3. Save Some, then Save Some More
The goal is to save enough during your working years to replace your income when you retire. With increased longevity, this often means working for 40 years to replace income for as much as 30+ years!
It’s hard to know exactly how much to save to cover this period of time. Most studies say 10 -15% savings per year is a good target.
It isn’t exactly as simple as hitting that target, though. Be sure to consider how long you have been saving. If you’re in your 20’s, saving 10% is a great start. However, if you haven’t been a good saver, you may need to save 15% (or more) to reach your income replacement goal.
When we think about retirement, we all have a very different image of what financial independence looks like … The amount we need to save today depends on the vision we have of the future. Most of us don’t want to be forced to change our standard of living upon retirement.
The portion of your income you need to replace depends on your vision for retirement. If you plan to travel the world, you likely need to replace about 90% of your income at retirement. However, if you plan to spend the days gardening and taking your grandchildren to the park, you may need to replace 70-80% of your income at retirement.
There are many things I feel are important when educating plan participants. Because each plan is unique, it is very important that each participant understand the options she has and how to translate goals into successes using her savings targets. By asking the important questions, taking full advantage of employer contributions, and sticking to a savings goal that suits your vision for retirement, you can achieve financial independence.
My last piece of advice: Make Sure You Understand the Lingo! To help, I have provided a brief glossary of the terms that often appear when discussing retirement plans. Any questions, just ask!
Retirement Plan Glossary:
Asset Allocation: The breakdown between equities, bonds etc. in your account.
Financial Independence: Saving enough to allow you to live comfortably through retirement.
Income Replacement: How much money you need in retirement to replace your income.
Plan Participant: An employee who contributes and/or is eligible to receive benefits from an employer sponsored retirement plan.
Plan Sponsor: The employer that sponsors a retirement plan for employees.
Rebalance: Bringing the asset allocation back to the original percentages.
Safe Harbor Match: A match formula decided upon annually by the sponsoring employer.
Safe Harbor Non-Elective Contribution: 3% of compensation contributed to participant accounts regardless of the amount they defer into the plan.
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This post was written by a member of the Plancorp Women’s Initiative, which strives to advocate for clients and women in the community by addressing topics specific to their financial lives. For more information about the Women’s Initiative and how you can get involved, email sara@plancorp.com or visit the Plancorp Women’s Initiative page.
