A New Employee’s Guide to Retirement Plans
March 29, 2018
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After college, starting your first entry-level job can be overwhelming. You have to learn your company’s office norms, understand policies and procedures, and fill out a heap of paperwork. When you get your packet on retirement plans, going through all of the information can feel like learning a new language.
However, it’s important to understand your retirement options so you can start saving as soon as possible. The earlier you start contributing, the more you’ll have for retirement.
Understanding employer-offered plans
There are three main kinds of employer-offered plans. You don’t get to choose what kind of retirement plan to use. Instead, the plans available to you are dependent on the type of employer you have:
- 401(k): A 401(k) is an employer-sponsored retirement plan. It allows you to contribute a portion of your paycheck — before taxes are taken out — to your retirement fund.
- 403(b): A 403(b) is just like a 401(k), except it is for employees of non-profit organizations, churches, and public schools.
- 457 Retirement Plan: A 457 Retirement Plan is usually offered to employees of government agencies.
Investing to get the full company match
As part of their benefits package, some companies offer a contribution match to their employees. That means they’ll match your savings up to a certain percentage.
For example, your employer might offer a dollar-for-dollar match for up to five percent of your salary. If you earned $30,000 and saved five percent of your earnings for retirement, that means you’d save $1,500 on your own. But, because your employer matches your contributions, you’d receive another $1,500 in your retirement fund.
An employer-match is a valuable benefit. It’s basically free money you can use for your retirement, so it’s a good idea to contribute enough to qualify for the full match. Otherwise, you’re leaving money on the table.
Choosing your investments
When you decide to enroll, choosing your investments can seem impossible. Luckily, there are options available to beginning investors that can help make the decision-making process simpler.
An excellent option for young investors without backgrounds in investing is a target-date fund. With a target-date fund, you select a plan based on the year you plan on retiring. For example, if you plan on retiring in 30 years, you’d pick a 2048 fund.
When you select that fund, it automatically diversifies your investments for you. While you’re young, it will invest more heavily in stocks to help your money grow. As you near retirement age, the fund will become more conservative, increasingly focusing on bonds and cash so you don’t risk the money you need.
Target-date funds are great choices for passive investors. As you learn more and have more money to contribute, you can start experimenting with other investment options, such as index funds, individual stocks, and mutual funds.
Developing a strategy
As a young graduate just starting out, stock market fluctuations aren’t so important. When the stock market goes down, that can actually work in your favor. You can buy more now when the prices are low. Then, when the market recovers, your money can work harder for you and grow.
Instead of trying to time the market, stick to consistent and regular contributions. By steadily adding to your retirement, you can ensure long-term growth.
If your employer doesn’t offer a retirement plan
While an employer-sponsored plan offers many benefits, it’s not your only option for retirement savings. If your employer doesn’t offer a plan or doesn’t have a match program, there are other retirement vehicles you can use. One of the best options for new graduates is a Roth IRA.
You contribute post-tax dollars to a Roth IRA rather than pre-tax. That means that you’ve already paid taxes on the money you save. When you retire, you won’t have to pay taxes on any withdrawals because you already paid taxes on your contributions.
If you decide to withdraw money from a 401(k) early, you pay income tax on the withdrawal and a penalty. Roth IRAs work differently, you can withdraw the money you contributed without paying a penalty. In an emergency, you can use your Roth IRA to help cover the bills. Tapping into your retirement fund should always be a last resort, but a Roth IRA can be a useful tool if needed.
Saving for retirement
When you’re starting a new job, going through all of your benefits can be time-consuming. But your retirement benefits are one of the most significant assets you have. By taking the time to do your homework and contribute to a retirement plan now, you can ensure a strong financial future later on.
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