Saving for retirement doesn't have to be confusing, but it is important
Saving for retirement doesn’t have to be confusing, but it is important
If you’ve ever endured on-the-job training at a new company, you’ve likely found yourself half-comatose while the benefits guru blathered on about your company’s rich retirement plan.
Employee benefit plans like the 401(k), easily the most popular among them in the United States, have long served to help employees prepare for retirement whilst confusing them almost as much as the beleaguered Affordable Care Act.
What you most need to know about any company plan that offers a match of some sort is that you should certainly consider participating in it. Beyond that, the questions and baffling array of options abound.
Go ahead, tell yourself this one thing: it doesn’t have to be this difficult.
Let’s get to saving
Defined contribution plans have just a few variables which require a participant’s input.
Don’t make this any more challenging than it has to be. Almost all of the talk you’ll hear from any benefits guy can be boiled down to these three simple decisions.
First: How much to save?
Many “rules of thumb” abound which purport to tackle exactly this question, but I hardly believe any of them. The basic fact of the matter is that most people get hung up on this question and attempt to tackle it themselves with minimal support.
Today, with so many calculators available for free on the web to give you answers to exactly this question, there is absolutely no reason that an approximate answer cannot be gleaned quickly and easily online. For starters, you can feel free to use the savings calculator called “retirement savings” on our own company’s site:www.contewealth.com.
While these calculators are helpful, a more detailed analysis can help to develop a more reliable plan. Let’s face it, this is planning for those years you’ve always envisioned post-employment, it probably isn’t something for which you want to cede all responsibility to an online calculator.
Second: How much to tax?
Once you know how much of your own income you’ll want to save into the plan, consider whether it makes more sense to defer taxation on those savings or to take your lumps today.
If your plan allows for savings into a ROTH 401k, then the question above is one worth pondering, if not, then just skip to the next segment because you likely only have access to the Traditional 401k option.
Where the ROTH differs from the Traditional 401k is primarily in its tax treatment. Savings into the ROTH portion of a 401k are taxed when the money is earned at today’s income tax rates.
Similar to the Traditional 401k, the savings will grow without tax consequence annually under the shelter of the plan, but differences emerge again in the distribution phase of one’s retirement.
When a ROTH 401k is rolled to a ROTH IRA in retirement the distributions from the initial savings are not taxed again; however, even the tax deferred growth (the money that had grown under the tax shelter and has never suffered the diminishing effect of taxation) is not taxed. That’s right, this is the holy grail of retirement savings: tax free income.
If you haven’t held the ROTH for at least 5 years, and if distributions of growth occur prior to age 59.5, then the distributions could suffer taxation.
In contrast, a Traditional 401k allows you to avoid taxation in the year that you save income into the plan, thus allowing for a greater initial savings into the plan, but in retirement all of the income that you take from this portion of the plan is taxed as income to you.
One might consider whether or not he or she expects to be in a higher income tax bracket in retirement, and this could help to decide whether to suffer taxation at one’s current rate or at the rate in retirement. If you would prefer taxation today, then the ROTH may be worth considering, if you would prefer taxation in retirement, then the Traditional 401k may be preferable.
Third: How much to risk?
Really what we are asking here is “How comfortable are you with losing how much money in a market downturn?” With so much market turmoil in our recent past, many investors find themselves unwilling to expose themselves to the risks of market declines, but with the prospect of inflation on the horizon, the greater risk may be in not investing at all.
Consider this: $1,000 today can purchase you $1,000 worth of goods. Now toss that $1,000 in the bank in a non-interest bearing account (which is, sadly, too often the case in many stable value accounts today) and wait about 20 years. If inflation has hung around a 3% rate annually over that time period, then your $1,000 sum in 20 years will only purchase you $554 worth of goods. Ouch.
While the discussion as to which holdings in a 401k plan are less risky than others is far beyond the scope of this column, many company retirement plans put an adviser in front of you to help you decipher the differences in investment options. Even if you don’t have access to an adviser with your plan, there are plenty of licensed individuals who can help you answer just this question, don’t be afraid to call them and ask for their help.
This is your retirement, your money, and your plan.
Anthony M. Conte is Managing Partner at Conte Wealth Advisors with offices in Camp Hill, Pennsylvania and Fort Myers, Florida. He has a Master’s Degree in Financial Services and the CERTIFIED FINANCIAL PLANNER ™ certification, and he welcomes your emails: firstname.lastname@example.org.
Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors, LLC are not affiliated.
The opinions expressed in this column are solely the writer’s and do not reflect the opinions of PennLive.com or The Patriot-News.
Before acting on any financial advice, readers should consider whether it is suitable for their circumstance and consider seeking advice from a financial or investment adviser.