By Renee L. Newman, senior vice president and Wealth Management director for Sterling Bank
Ready for some troubling statistics? More than 50 percent of Americans haven’t taken the time to calculate how much they need to save for their retirement. In addition, of those employees fortunate enough to have access to a defined contribution plan – a 401(k) being the most common example – 30 percent choose not to participate. Given that the average American will spend 20 years in retirement, it’s no surprise that many observers are concerned.
In 2012, Congress, in an effort to draw attention to the importance of saving, instituted National Save for Retirement Week. Held the third week of October every year, National Save for Retirement Week provides an opportunity for employees to re-evaluate their individual retirement goals and explore ways to reach them through employer-sponsored retirement plans.
It’s a noble effort, especially when you consider all the benefits of participating in an employer-sponsored retirement plan, but it’s not always easy to know where to start. If you’re one of those on the sidelines, or if you’re already saving but not sure you’re taking full advantage of your opportunities, check out the following quick tips on how to put your employer-sponsored retirement plan to work for you.
Identify Your Options
First, learn what employer-sponsored retirement plans are available to you. All it takes is an easy call to your human resources department to learn what your employer offers and whether or not you are eligible to participate. See what you need to do to enroll in any available plans, and be sure to request an individual benefit statement. It’s also worth investigating what benefits you may have accrued through previous employers. You may even be entitled to retirement benefits through your spouse’s current and past employers.
Don’t Leave Money on the Table
Many employers offer to match a portion of the funds you invest in your 401(k), 403(b) or other retirement plan. Essentially, you receive a participation bonus for contributing to your company’s retirement plan. There’s no reason to miss out on free money, make sure you contribute what’s necessary to receive the maximum employer match.
Even without a match, defined contribution plans offer considerable tax benefits for employees. Contributions are made pretax, which can provide a significant advantage. For example, if you’re in the 25 percent tax bracket, investing $1,000 would reduce your take-home pay by only $750 for the year. In addition, all qualified retirement plans – including 401(k) and 403(b) plans – defer any capital gains taxes from the plan until the participant begins taking withdrawals, at which time taxes are generally considered ordinary income and not subject to capital gains tax. Those dollars that would have been paid to the IRS are instead left to grow in your account, which enables you to create more wealth for your retirement.
Know What You’re Paying
While employer-sponsored retirement plans are a great deal, it’s worth noting that mutual fund companies hired to provide the investment platform are not charities. They provide expertise and guidance for investing your dollars, and in return they take a percentage of your assets each year. Often times this cost isn’t made obvious, so it’s important that you take the time to review those expenses by evaluating the required disclosures provided by your employer, which outline the fees and expenses of the plan. Situations vary, but typically any expense ratios above 1 percent are likely too much. Talk with your plan administrator to identify the most cost-effective funds within your plan, and if costs seem excessive work with your employers to explore other plan options.
Basic Maintenance
While many plans have automatic contribution options, a retirement plan is not something you can “set and forget.” It’s imperative that you review your account statements once a year at a minimum. That way you can ensure that your portfolio allocation still matches your risk tolerance and that you’re on track to meet your retirement goals. It’s important that you identify shortfalls in a timely manner and perform any rebalancing that may be necessary due to market performance or changing assumptions about current and future tax rates. Be sure to review your plan from a lifestyle perspective as well, taking into account any changes with regards to your personal circumstances that might affect your financial situation in retirement.
Sometimes Employer-Sponsored Retirement Plans Aren’t Enough
Most people want to continue to maintain their current lifestyle when they retire, but it’s almost always a surprise to learn what it takes to make it happen. Most experts recommend withdrawing 3–4 percent from your investment portfolio annually. That means that if you would like to have an income of $30,000–$40,000 a year in retirement, you’ll need to have at least $1,000,000 in your nest egg to achieve that goal.
To many, that’s a daunting number, but with a solid game plan it’s feasible to achieve. You may just need other investment vehicles to get there. Thankfully, the IRS provides a number of additional tax-deferred options beyond what’s available through employer-sponsored retirement plans.
Individual retirement accounts, or IRAs, are the traditional option. Depending on your income level, you can contribute a specified amount each year on a pretax basis. Roth IRAs are option as well; they allow you to make after-tax contributions to supplement your retirement savings, and in most cases, they have the added benefit of any earnings being free of capital gains and income tax during retirement. A financial adviser can help you review your options and identify the combination of investment vehicles that best fits your individual circumstances and needs.
Renee Newman serves as senior vice president and Wealth Management director for Sterling Bank. With more than 20 years in the banking industry, Newman has extensive experience in commercial, wealth management, treasury, retail and real estate banking. She and the Wealth Management team work with the mass affluent and affluent market to help individuals and families grow, manage, protect and ultimately transfer their wealth.