This was one of three articles that was published in the Register-Guard’s annual special publication, Destination: Retirement, in March 2015.
Putting away enough money for retirement is not rocket science, but you must commit to doing the right thing with your dollars.
Saving for the future is easy with a 401(k), but there are some things to think about. What happens to the money if you change jobs? What are your options if an employer doesn’t offer a 401(k)? What is a 401(k), anyway?
“A 401(k) is a retirement savings plan offered through an employer,” says Charlene Carter, a certified financial planner and president of Carter & Carter Financial in Eugene. “It’s what’s called a qualified plan, meaning the money you put in is pre-tax. It’s administered by a special group for the entire company.” 401 is the part of the tax code that created these types of group savings plans.
“All those numbers, the 401(k), the 403(b) and others, those are all sections of the tax code where Congress said, ‘OK, people want to set aside money for retirement, so we’ll give them some sort of tax advantage for doing that, some sort of incentive,’” says David Hausam, a certified financial planner at the Santa Clara branch of SELCO Credit Union.
Invest it, and keep it there
How much a person needs to save in a 401(k) depends in large part on when you start. Of course, saving at a younger age means more accumulation. “A rule of compounding is try to save 10 percent of what you earn annually,” Carter says. “If you have a $40,000 income, you want to save at least $4,000. If you can save 15 or 20 percent and you’re in your 30s, you will retire really comfortably. But you’ve got to do it and keep at it.”
Carter says the most important thing is that you start saving. “Just do it, $25 even,” she says. “As you get a raise, take half your raise and put it in your 401(k). Don’t even take it home; otherwise you’ll spend it.”
She says 401(k)s should be considered money that never gets touched until you’re in retirement. “The biggest mistake people make is they end up taking that 401(k) money out and spend it,” she says. “Every day I meet a new client who says, ‘Oh, I would have had so much more if I hadn’t taken it out.’” Even what seems like a small amount of money, like $30,000 for a down payment on a home, ends up being a large loss over time because of taxes and other penalties for removing the money, which could have been doubling and tripling over the years.
IRA rollover options
Because 401(k)s are offered as a perk of employment, the plans can go south if you change jobs or take a job with an employer that doesn’t offer a 401(k). When changing employers, most people move their 401(k) investments into an IRA, or Individual Retirement Account. “If you change jobs, the administrator gives you forms to fill out which take that money and roll it into an IRA,” Carter says. “If your new employer has a 401(k), often you can roll it to your new employer. I highly suggest that you not just leave it with your former employer because you’ll forget about it.”
Hausam says there are many forms of IRAs that people can manage on their own, whether or not their employer offers a 401(k). He suggests setting up an IRA early on so that it’s already in place if you need it.
“We might be with a number of different employers over the years, and it might be much easier to keep track of your money if early in your career you created an IRA that you can roll a balance into,” he says. “So instead of having three or four accounts scattered over different places, you’ve got one that you use to build up money at your current employer, and when you leave that job you roll it into your IRA and you manage it there.”
Taxed now or taxed later
There are some difference between traditional IRAs and Roth IRAs, primarily in regard to tax benefits and contribution limits. “You’re earning the money now in 2015, so the difference is when do you want to pay taxes on the amount you’re putting into the IRA?” Hausam explains. With traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement. Roth IRAs permit an annual contribution of $18,000, or an extra $6,000 if you’re over 50. IRAs have a lower contribution limit of $5,500 for most people under 50; another $1,000 is allowed for people over 50.
Let savings do the work
Overall, 401(k)s are a painless way to save for retirement. “You don’t have to decide whether to add money or how much to add,” Hausam says. “If you do it through a payroll deduction, it’s an easy-to-execute process that winds up working quite well for lots of people.”
Hausam believes that people should save as much as possible. “If through most of your working years the total savings is around 20 percent, you’re probably going to be in a pretty good position later on when you get to a normal retirement age. It’s important for everyone to become familiar with their options. If they can afford to save, they’re going to be happier later on.”
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