This morning’s water cooler conversation started off very light hearted, as most Friday mornings do, but took a sudden dive into the scary waters surrounding retirement and savings. Being a government employee, I just assumed that my co-workers and I were all on the same path: employer funded retirement accounts, plus additional personal 403b accounts and savings… I mean, that is how I was raised – “[s]aving for retirement is an investment into your own future, no one will do that for you” still echoes in my ears. As the conversation progressed, I realized that I was the only one, at 33 years old, that had taken this path to attempt to secure a financially stable retirement. Later I received an email from a co-worker asking how I recommend they start on they own retirement savings journey, so I thought I would share my response.
The Miracle of Compound Interest
The best advice I ever received in regards to my retirement savings was to start early. The younger you start, the more ground you make with compound interest. Google it. Simply put, you earn interest on your contribution plus the previously accrued interest. Start saving at 30 years old, instead of 20 years old, and you will need to contribute 3 times as much to have the same balance at retirement age.
Employer-Based Retirement Plans – DO IT!
Currently, I work for an agency that offers a 6% contribution to my retirement account and my employer pays the required 6% employee match, on my behalf. 12% of my annual salary is a great place to start. If you are in this situation, it is also important to research additional retirement options to help supplement your retirement goals. For example, I have set up a 403b account that I put $300 a month. The best part about this is that the $300 come out of my check pre-taxed – lowering my adjusted gross income (AGI)! If you want to get crazy, let’s talk about also setting up a Roth IRA as well!
Many private organizations offer a percentage 401K match; therefore, if you pay 3% into your 401K account, then the company will match your contribution and also pay 3% into your account. Why wouldn’t you automatically put in, at the very least, the amount the company is also willing to contribute on your behave? Free money!
Make sure to contact your HR department to determine if this is something that your company offers. It is literally their business to know and to help you.
My Personal Pitfall
Every year when I receive my annual raise, I increase my 403b contribution according. This way I don’t miss the money because I didn’t build my monthly budget around it. This is a very easy way to increase your savings as you move closer to your retirement.
When I first started to contribute to my plan, I made an unrealistic monthly goal and it backfired on me because I was no meeting my monthly expenditures and it was very stressful.
I used Google to find a great retirement calculator to determine how much I could afford to contribute and increased my contribution as I could afford to do so. A staggering 40% of Americans underestimate what their financial needs will be post-retirement.
Rollovers
If you are leaving the company and get asked the big question – rollover or cash out? ALWAYS rollover. Cashing out your 401K or 403b can lead to high fees and tax implications. Do your research and talk to your tax account. I understand the incredibly tempting allure of fast cash but do not fall into that trap if you can! As my dad says “no one else is saving for you…”
Check out the Graphic below, It provides an interesting visual insight into generations and how they go about save for retirement differently.
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