Understanding employer retirement benefit options such as 401k’s and their public employee counterpart 403b’s/457’s is an extremely important aspect to consider. Unfortunately, too many employees do not to take full advantage of these benefits. The challenges might range from lack of information and education about the investment options to truly grasping the long-term benefits of contributions and compound interest. Let’s examine some of these challenges.
Lack of Education
So after hunting for either a short or long period of time, you finally land a job you’ve been searching for. Upon finalizing the hiring process through Human Resources (HR), you are handed an employee benefits package. In this package will typically be Health Insurance options (if provided) as well as retirement options (also if provided). Then you are told to complete the necessary information, usually with a day or two, return the completed documents to HR and off you go to start working. Now, unless you change employers or you personally inquire about your selections, years, sometimes decades, will go by without revisiting your original election options. Add to the fact that at the time of hire, you might or might have not received any guidance in how to make investment elections or how much should you contribute, it’s easy to see why so many Americans are not on track when it comes to retirement savings.
Investment Selection
Most employers that provide a 401K/403B/457’s will provide the employee at the time of hire a basic overview of their retirement plan benefit. The problem with these generic brochures, is just that, they are generic. They will not address your individual concerns or goals. It’s typically up to the employee to do their own research as to how to allocate the funds being contributed. Are you an aggressive investor? Are you conservative? Are you somewhere in between those two poles? Which funds will provide the best rates of return? How to I interpret the information presented in the brochure? As you can see, there are several factors to consider. Not having adequate access to resources to help best answer some of these concerns, most employees simply ask a veteran co-worker, “What did you choose?”
Contributions
Most employers who offer a 401k/403b/457 will provide such a benefit without an employer match (up to a certain percentage of the employees contributions). If you are fortunate enough to be employed by a company offering an employers match, TAKE IT! This is free money and consider taking the maximum contribution limit. Think of it as a raise to your current salary. If your employer does not provide a matching contribution, you should still be contributing to the plan. The contribution limit for 2020 into 401k’s/403b’s and 457’s is $19500. Why is this figure important. Your contributions into any of these plans are pre-tax deduction from your salary.
Example: $100,000 income earned for 2020 – At tax time, if I contributed the maximum allowable contribution of $19,500 into your 401k/403b/457, my adjusted gross income for 2020 is now $79,500. $79,500 is now my taxable income.
This is HUGE!! As a $100,000 income earner, you are mostly likely paying an average of 24% income tax. By contributing the max, in essences, your $19,500 401k contribution already earned a 24% rate of return. Who would rather offset some income now than pay the IRS more of your hard earned money?
Additionally, these retirement vehicle grow tax-differed. This means you will have to pay taxes on the money at the time of withdrawal. This is also beneficial because at retirement, the average American is making less than while an active employee which puts them in a lower tax bracket.
Long-term Benefit
All 401k’s/403b’s and 457’s are investment type vehicle. They are typically invested in mutual funds which provide the benefits of compounding interest over time. This is why understanding rates of return and contribution limits is pivotal. These instruments are put in place for the employee to benefit short and long term. The problem is this information isn’t getting to the necessary audience. The difference of a few more dollars out of your paycheck spread out over 25/30/35yrs benefiting from a decent rate of return can be extremely significant on the back-end.
I Can Help
Make it a point to review your employer provided 401k/403b/457. As a licensed Investment Professional, I can help review your current 401k. This is an absolutely free process. No hidden fees. My goal is educate you in order for you to maximize your retirement benefit. Contact me directly via email at louis@louisromero,com.