No doubt about it, the news is downright discouraging these days. Between the COVID-19 pandemic, the recent unemployment statistics, and the ever-increasing isolation from one another that we are experiencing, it’s hard to remain positive, plan ahead, and envision a brighter future. But that’s just what we need to do, keep planning for tomorrow and envision that brighter future.
The pandemic has definitely highlighted cracks in our social fabric: lack of a real healthcare system, financially strapped families, the white-collar/blue-collar divide, just to name a few. Each topic merits its very own, hours long discussion. I want to focus on the financial for now.
I just finished reading Millions of baby boomers are getting caught in the country’s broken retirement system in the Washington Post. Depressing! It raises a lot of issues. To be clear, a few of the people profiled in the article never bothered to really save. Those who did, either didn’t manage to save enough, or were hit with crushing financial disasters (the aforementioned lack of national healthcare being one). The article also takes a swipe at defined contribution workplace retirement plans; think 401(k) plan which is the most recognizable.
Save from an early age for truly golden years!
The article mentions that participation in these plans is voluntary, not all employers offer them, and that they come with high fees. When they were introduced, they were part of a four-legged stool for retirement. Those four legs were a company pension plan, Social Security, personal savings and investments, and the 401(k) as a supplemental savings investment plan for workers. Realizing they could save money and further enrich shareholders, corporations quickly began shedding pension plans. Pensions, after all, are usually paid for the life of the recipient (and sometimes a beneficiary). One leg of the stool was removed. Most workers didn’t understand, or realize, that they needed to compensate for this by saving more personally, and by contributing more to a 401(k) plan. As for savings, well, it seems that saving cash became old fashioned, and not cool. Besides, easy credit is rampant in America; buy now, pay later. The savings rate in America fluctuates wildly and most folks never bother to save. Another leg of the stool gone!
Defined contribution plans can pick up the slack of the missing legs of our retirement stool, but it takes a lot more personal responsibility, sacrifice, planning, and financial education. It also helps if you start young, but even getting a late start in life can be a huge help come retirement. These lessons were not relayed to American workers clearly and in an impactful way. Financial literacy in the United States is appallingly low.
Defined contribution plans have an immediate triple advantage for workers: they reduce your taxable income, you get free money from your employer via the match, and as an ERISA-qualified (Employee Retirement Income Security Act) plan it is generally protected from creditors!
When you contribute pre-tax from your salary, your taxable annual income decreases. If you are on the cusp of particular tax bracket, contributing to your 401(k) could reduce your taxable income enough to put you into a lower tax bracket. Say, from 24% to 22% for example.
Most employer plans provide a match. That is, the employer will give you money up to a certain percentage that you contribute. A common example is the employer will match 50 cents per dollar you contribute up to 6% of your salary. It varies by employer. If you are not participating, or participating to the match level offered, you are leaving free money on the table.
The 401(k) plan is protected from creditors provided that it is qualified under ERISA. Check your plan though. Some plan types (like a 403(b)) may not be protected, or have less protection. There are various state and federal regulations that apply to different plan types. Generally speaking, though, ERISA-qualified plans offer greater protection from creditors, bankruptcy, and civil lawsuits.
To recap the benefits of a qualified defined contribution plan: you can reduce your annual tax bill, you get free money from an employer that offers a match, and this money is protected from bankruptcy, creditors, and civil lawsuits. What’s not to like!
Save early, save often - it adds up fast!
The Boomers are a harbinger. We need to listen to their stories. If you are a working Boomer, please start saving anything you can. With 40% of Americans relying only on Social Security for their retirement income, we must get better at prioritizing saving and investing. Key to a successful retirement is saving no less than 15% from every job held over the course of a working career. More when you can do it. Most people are not that dedicated, nor are they willing to sacrifice in their working years to prioritize their golden years. We have the tools to do so with a plethora of financial information available at our fingertips. We can use online, higher-interest rate savings accounts, workplace plans like the 401(k), IRAs, CDs, taxable investment accounts, and many other options. The problem is not the availability of options, it’s shifting our mindset. That is the hard part. Maybe this pandemic will help shift our priorities from being spenders, to being better savers. By starting early in life, saving from every job we have, the task becomes much easier. YOU are your most important asset, so pay yourself first!
As an independent Certified Financial Planner™, I can help you plan for a better financial future and be on top of your goals. Contact me and let’s get started on a savings plan! #talktometuesday #education #Hireaplanner #tax #stressfree #savings #401k #Boomer #BabyBoomer #SocialSecurity