Alright, so maybe the title was a bit presumptuous, but I needed to get your attention. You NEED to be saving for retirement now. I don’t care if you’re 18 or 28, now is the time to start. If you wait until you’re 40 to start thinking about this, you’ll only have 25 years to save up over a million dollars. If you start now, you’ll have a lot more time for that money to grow in the stock market, meaning you’ll pay a lot less out of pocket.
Millennials Aren’t Saving for Retirement
In a conversation with a good friend a few weeks ago, we got on the topic of retirement savings. She asked “are we supposed to start that now?” She is in her late twenties, so I wanted to scream, “you should have started that years and years ago! Don’t you understand how far behind you are?!”
Before speaking I realized the answer: of course she didn’t understand. No one talks about this on the radio, social media, or TV, and if they do it isn’t laid out in such a way to make sure us “young folk” know it applies to us as well. Millennials aren’t searching for news articles, in fact, 68% of us get our news from social media.
Even so, much of the “news” you see on social media is a celebrity hoax or a joke. Unless you go out and look for the information, it’s hard to find sound advice. The unfortunate thing is that so many people aren’t even thinking about retirement at this age. We are the generation of now, not of planning far into the future.
I decided to do my part and write this series of articles to get the information in front of more millennials, at least the one’s who care enough to read my blog. We’ll start with one of the most obvious reasons to save for retirement: getting free money.
Free money? Ooohhhhh. I know it sounds great, right? Well it is.
And just where does this free money come from, you ask? Your employer. Yes, this is in addition to your paychecks. It’s called a retirement account company match. Many employers will match a certain percentage or amount of money that you put into your 401k or 403b account. Let’s say you put in 3%, and your company matches that 3% in full, then you would essentially be putting away 6% into your retirement account each month. That’s a 100% return on your investment.
Now, the same goes the other way – if you don’t put anything into that account, neither do they.
It’s safe to say, if you are not contributing any money from your paycheck, you are missing out on guaranteed money. And that is not a smart idea.
Not sure if your company does this?
If you aren’t sure whether or not your company matches your contributions, ask a coworker. If the person you ask doesn’t know, contact your HR department. Are you making some excuse about being too busy to call or ask? Don’t even try it – this is likely the one thing each person in your HR department will know about, so they will be able to tell you over the phone in a matter or 30 seconds or so.
However, a simple yes or no won’t really help you once you get off the phone. Here are some questions to ask if they say that they do offer the match:
1. What percentage of contributions do they match?
This is typically somewhere between 3-6%, but they should be able to tell you right off the bat.
2. How much do you have to contribute to get the full match?
I know this may sound extremely similar to the first question, but let me explain.
Let’s say your company matches 4.5% of your contributions. Great, so you can contribute 4.5% and get a 4.5% match, right? Well, not exactly.
They might match the first 3% at a 100% match. If you put in 3%, they put in 3%.
But here is where it gets tricky: after the first 3%, they only contribute a 50% match on the next 3%.
If you contribute 4%, they contribute 3.5%
If you contribute 5%, they contribute 4%
Only if you contribute 6% will you get the full 4.5% match.
I know your head is probably spinning, but this is a very common scenario and I want you to be aware of it.
If you don’t want to get bogged down by the details, just ask them how much you need to contribute in order to get the full company match. That’ll do.
3. What company do they have the 401k/403b with?
If they say Vanguard, Fidelity, or T. Rowe Price, you should jump for joy. These companies have the lowest fees and some great investments for you to take advantage of.
4. How long is the vesting period?
Most companies set a period of time you must work for them in order to keep the money they’ve put into your account over the years. This is called the “vesting period”. Some require 3 years, but some require 5 or more.
If you don’t work for the same company for the amount of time required to be “vested”, you lose all of that money when you leave. A company match is a huge benefit to working for that company, but only if you commit to staying there for a certain period of time.
5. Were you automatically opted into the plan?
Yes, many companies automatically opt you in for the plan when you start working for them. You actually have to opt-out if you don’t want to be a part of this. The problem is, they usually don’t opt you in for the full amount of the match they offer. For example, your company may automatically puts people at a 3% contribution.
This is great for those of you who didn’t even know you need to start saving, because well, you may already be doing so without realizing it. However, 3% is not anywhere close to the amount you need to be investing for retirement, and in this case wouldn’t even get you the full amount of the match.
6. If you were not automatically put into this plan, ask how you can go about doing so now.
If this article was earth shattering for you and you didn’t realize you needed to be putting money away for retirement already, you may want to start with 6% so it’s not such a shock to your paycheck. Then gradually increase the amount you contribute over time.
You can change the amount you put in constantly. If you find that 6% is too much, you can switch it back so the following paycheck has a lower amount taken out.
If you have already been putting money aside, I challenge you to add 3% more to what you’re already putting away. It’s not much, but over time it will make a huge difference.
This stuff is very important
You should be contributing as much as you can towards retirement. Most financial “gurus” will tell you 15% is sufficient, but the more the merrier. Don’t use 15% as a benchmark, look at it as more of a guideline.
I am going to be putting together more articles about reasons you should be contributing more towards your retirement accounts, and why it is not financially smart to NOT be contributing towards your future.
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