Kristina Duarte of Stantec (Stamford, CT)
Stamford, CT Resident
Since the company’s retirement plan consists solely of their 401K, it is a good idea to participate as soon as you are eligible. If the company offers a match, then try to contribute the percentage of your income required for the match. You can always increase or decrease your contributions at any time. I contribute the maximum amount possible to my 401k. The company matches 401k contributions up to 4.5%. So that is free money! Try getting a return like that on a savings account at a bank.
The 401k is a relatively safe, convenient way to save for retirement, especially if you start at an early age. This is because you have time on your side, and the concept of compounding. The market can fluctuate wildly year-to year, but over time, and with the right asset allocation, your 401k can continue to grow until you will need to withdraw the funds or are required to withdraw the funds. Many people like to invest in the Target Date Funds, so that the funds are invested based on your expected retirement year. Your allocation of funds in stocks & bonds should correlate to your age. The closer you get to retirement, the less risky your portfolio should be. It is not enough to just look at past performance of the funds. It is very important to review the expense ratios of each fund before investing. There are many ETF’s with good investment returns, that also have very low expense ratios. It is so rewarding to see your 401k grow over time.
Year-end 2018 was a little scary, but for retirement, you must look to the long-term.
Also, in most companies, you have the flexibility to invest in the Roth 401k (after tax) or the Traditional 401k (pre-tax). There are benefits to both, so I chose to invest 50% in the Roth, 50% in the Traditional. This way, when I need to withdraw the funds, I can decide whether to withdraw from the Roth if I don’t want to increase my taxable income, or the Traditional if I expect my income to be lower in a particular year, and taxes are not a big concern.
Most companies will allow you to borrow up to 50% of your 401k, with the expectation that you will pay it back. I would only do this as a last resort, because this will affect the growth of the 401k if you don’t pay the money back quickly.
For someone who thinks they cannot afford to contribute to their company 401k, I would suggest starting out at 5% of their income in the traditional 401k. This way, with the tax savings, the net effect on the paycheck would actually be less than 5%. For example, a person earning $100,000 per year can contribute 5% ($5,000) pre-tax, at a 25% tax bracket, this person would be saving $1,250 in taxes for a net decrease in their paycheck of $3,750, which is actually 3.75%.
We can’t depend on Social Security to fund our retirement. Social security helps, but it’s not enough to support a lifestyle you want to enjoy during retirement. It was never meant to be the sole source of our retirement income, rather it was created as a safety net.
In retirement, we won’t always have the income we have grown accustomed to during our working years. With modern medicine, we are living longer and our years after retirement have become increasingly longer. Therefore, it is that much more important to start building yourself a safety net while you’re young. The earlier you start, the bigger your safety net will be in retirement.
Contributing to your 401k as much as possible will help to ensure financial freedom in retirement. I found that my contributions have also helped me to learn to live within my means, but late last year I maxed out my contributions and my paychecks were suddenly much bigger. Think of it as giving yourself an end-of-year bonus after acknowledging that you have saved a significant amount of money toward your retirement goals.