The future always seems like a long ways away. It is the future after all. But once you start saying “oh I’ll take care of that later,” later will creep up on you faster than you think!
One area that most of us constantly ignore is saving for our financial future—namely retirement. Understandable, given that your current finances can be so overwhelming, it makes sense that your “later” finances often take a back seat. But before you know it, your “oh I’ll take care of that later” task will quickly turn into “oh snap why didn’t I do that” regret.
According to a recent study from the National Institute of Retirement Security a whopping 66% of millennials have nothing saved for retirement. That’s right a big huge zero. On top of that, only 5% are on track to save the right amount before they reach retirement age.
These statistics are terrifying because our generation is expected to have a longer life expectancy than previous generations. Meaning we all better pull it together otherwise, we won’t be able to afford to retire!
But why is it that millennials are so drastically under-prepared? The Society for Human Resources Management reports that millennials are simply not educated on employer retirement benefits like 401(k)s. Most have no idea what types of retirement benefits are provided, how they work, how they can enroll and why they should.
If you legit don’t know what a 401(k) is, don’t worry you are not alone. But before you reach 80 and realize “oh snap” I should have saved some money, take a few minutes to learn how to now. Trust me: you won’t need a DeLorean to see the impact of your good decisions later on.
Grab a pen and paper, friends. It’s time to #FututeProof our finances and get up to speed on all things 401(k).
401 Mm(k) What?
Spoiler alert: 401(k)s are actually not as confusing as everyone has made them out to be. They’re a really great benefit that most employers offer to employees to help you save for retirement. Essentially, it’s a financial plan that allows you to take a portion of your salary each month and put it into a savings account on a post-tax/pre-tax basis. The best part? Most employers offer matching incentives and profit sharing plans to help you increase the amount saved.
Before you enroll, remember that the money invested in the plan comes directly out of your paycheck. So if you have all your finances mapped down to the cent, you might want to rework your budget before you opt into the plan and include how much you want to contribute.
A Relationship That Truly Benefits You
The 401(k) is the most popular employer-provided retirement plan for a reason — it has a number of great benefits it provides. If your employer provides a match program, make sure you take advantage of this *basically* free money (cha-ching!). How it works is everytime you contribute money, your employer will contribute money too. Now that’s a great incentive to actually start saving, isn’t it?
To make the most of this benefit, always try to contribute the amount needed to get a maximum match. For example: if your company says they will match 50% of your contribution, up to 5% of your salary, you will have to put in the 5% to get the highest amount of “free” money.
Of course, match program rules vary, so check in with HR or brush the dust off of your employee handbook to find out the specific rules and requirements to claim this benefit where you work. Some companies will offer a higher percentage match based on years of service, so find out where you stand and start calculating how you can make enough to treat yo [future] self.
Don’t Forget Your Nest Egg
Now realistically, most people don’t stay at the same job forever, so what happens to your 401(k) when you decide to move to another company? Don’t just leave it behind (yes you can do that). If your new job accepts rollovers, take the amount you’ve saved with you and invest it in your new 401(k) or put the money into an individual retirement account. A word of caution — try to avoid cashing out your plan. If you do, you’ll have to pay a 10% federal tax penalty.
Another great benefit of this plan is you can keep contributing to the account for as long as you are working. Some retirement programs will cut you off at a certain age, but if you’re still employed at 80 you still qualify.
Additionally, investing in your 401(k) lowers your taxable income. Not only do you not have to pay taxes on the money you elect to save, you are also reducing the amount of money you will have to pay taxes on come tax season. Can you say “win-win!?”
No 401(k) No Problem
If your employer doesn’t offer a 401(k) plan or you’re looking for another option, there is another player in the retirement savings game—the IRA. An individual retirement account, allows individuals to earn funds for retirement without the support of an employer.
Wondering which acronym is right for you? Revisit your plans and goals and decide from there.
By now you should realize that it is a really good thing to utilize your 401(k). But here’s the big question: should you still contribute if you have a large amount of debt? According to Bankrate, if the interest rate on your debt is higher than the interest on what you are saving, it makes more fiscal sense to pay off your debt first.
However, that’s not the case for everyone. Each person’s financial situation is unique. Some people would feel more comfortable having a nest egg to fall back on before paying off their debt. Others would rather be debt free first. It all just depends on your current debt scenario!
The overall moral of the story — find out where you stand, make plans, start investing in yourself and do it now!