Patricia Hayes of SAC, Inc.
I really see myself as a 401(k) Champion! I'm approaching retirement age and, at this juncture, I feel as though I've experienced, even maximized, virtually every one of the many attributes that makes 401(k) saving superior to alternative savings methods. I didn't fully comprehend those attributes when I started out. I more or less discovered their power and potential as I encountered them in the course of my savings and investment career.
When my last child started school, I went to work for a small outfit in town, essentially just to "get out of the house" during the daytime hours that my children were at school. I certainly didn't expect that I would be working there for the next 25-plus years, as I have. Retirement wasn't on my mind at the time; I was thinking of earning some additional spending money. To the extent I was thinking about savings, it was for the kids' college or, perhaps, an addition to our home. My husband worked for large companies during his career and we looked to his defined-benefit pension benefits as supplying our needs for retirement.
The company I worked for did not offer any pension benefits for long-time employees, but it did have a 401(k) program. At the time, I didn't fully comprehend its value to me as an employee. I simply understood a 401(k) plan as an alternative to a pension program. Had there been no 401(k) program and/or the matching that my new employer made available, I would have accepted the position anyway. Today, those large companies my husband worked for no longer offer pension plans. Job security is also far less prevalent, so that plan portability and generous vesting features are essential features of a retirement plan.
Today, when changing jobs, young people should view the presence of a 401(k) plan with liberal matching as vital to their employment choice. While a job serves as a livelihood, a career must contemplate where one will stand when it ends. I took a job that turned into a career and my 401(k), which at the start was just an added benefit, has become the keystone to ending my career securely and successfully.
Why is that so? It's so, because of the many tax advantages that the 401(k) offers and the prospect that growth of your contributions will be multiplied through the matching effect, when your employer contributes in tandem with your savings effort. But, before covering how those tax advantages worked for me, I want to dwell a bit on the psychological side of saving. None of us likes to take a portion of our take home pay and put it into a savings account each pay period. It means taking away from available spending money and takes sustained discipline. With 401(k), you make the decision once, not every time you receive a paycheck. You sign up for the program and, thereafter, your take-home pay is yours; your savings goals have already been treated.
thereafter, your take-home pay is yours; your savings goals have already been treated.
This is a simple concept, but it's powerful. Today, there's automatic enrollment, a recognition by our Congress of the importance of overcoming that initial inertia to participation. But once the choice is made, your job begins to serve both your present and your future needs. You adjust to the take-home pay that is net of the 401(k) deduction and no further sacrifice for your retirement -- or discipline to ensure it -- is required of you. Not only that, but those deducted funds go into a tax-deferred account and you pay taxes only on the net amount you receive.
Decades will go by and you will not have to pay taxes on that deducted amount. It will accumulate without taxation and any growth, from interest or capital appreciation on your investments, will also accumulate without taxation. Your deductions will also grow, if you maintain the same percentage deduction. I started my job at a modest salary and have progressed with pay hikes over time to an executive's salary -- more take-home pay along the way, yes, but also more and more money going into my 401(k) each year. My initial goal of earning some extra "pocket money" has transformed into a retirement account that, even by itself, will comfortably support my retirement needs for many years ahead. I will finally pay taxes on my 401(k) withdrawals in retirement, but, almost certainly, at a substantially reduced tax rate from what I'd have paid in taxes during my peak earning years, had I taken that money home and put it in a jar.
Going back to the psychological impact of securing one's retirement with a 401(k), I have watched with a certain awe at the growth in my retirement account. One sees the power of compounding as funds saved without taxation blossom, as successful investments and interest earnings expand the base for further growth, and as monies segregated for retirement by plan restrictions flourish in the absence of impulse withdrawals. That's the joy of saving -- the pride in achieving a financial goal. There has also been a palpable sense of security in knowing that I will enjoy economic comfort in retirement when it arrives. I call my plan the "roach motel," because I can put money in, but invasion of the plan by third parties is prohibited. If you are ever in a position to file for bankruptcy, the courts cannot come after your 401(k) savings. 401(k) funds are protected from judgment creditors. When applying for financial aid for a college student, your 401(k) balances are not included as assets for FAFSA.
Finally, though, I find satisfaction in the flexibility of the 401(k) program. It's not just about sacrifice now and deferred gratification only when I reach retirement. I have not needed to access my 401(k) funds, but knowing that I could, were an emergency to arise, has been remarkably reassuring. I have had full access without penalty to my funds since turning 59 1/2. Before that, I have had the ability to take loans, up to 95% of my vested balance or $50,000, whichever is less. One's savings can be partially or wholly rolled over into an IRA account, where the breadth of investment choices and speed of withdrawal are greater, at least in my case. Those who stop work at 55, if they have attained their retirement goals early, can begin withdrawals without penalty; disabled individuals may also have penalties waived. Surprise medical expenses form another exception.
There's also the flexibility to invest your retirement funds. In my plan, we can choose from a wide array of funds. One can be fully invested on one day and out of the market by the next with the click of an online button. At times when the market was volatile, I could easily move my money into a cash position. It gave me the flexibility to invest whatever percentage I felt comfortable with at the time and also accorded me the freedom to invest the money that was already in my 401(k) plan one way, while placing my ‘future’ contributions in cash.
As I said at the start, I did not know about 401(k)'s many benefits when I began participation. I learned through observation and actually experiencing those benefits. I grew interested in knowing more, because each lesson learned produced greater benefits, satisfaction and open choices. About three years ago I rolled over a large portion of my 401(k) to an IRA. I was able to roll it over with no penalties because I was over 59 1/2. Once moved to an IRA my financial consultant spent the time managing the money rather than me having to check the balances and the funds' performances. I continued to save the full percentage allowable each year and I have once again accumulated more money in my 401(k). For me, my 401(k) story has been an unequivocal success and I believe it will continue to be as I move into retirement and begin distributions.