So many times, I heard this in my house and scratched my head. It didn’t make sense to me at the time. On my birthday I would receive a cake and then I would eat it. I have it; I eat it.
Well, of course, that is not what the figure of speech means, right. It means if you eat the cake, you won’t have it anymore. It’s gone. This lesson in life is valuable with savings. You can’t spend your dollars and have them.
There are many corporate retirement plans which our Firm manages. Educating employees on the ins and outs is a priority to us. After all, the cost of living is going to keep on increasing and what social security or pension benefits cover seems to be less and less. Pension plans used to be the norm where one would work for a company for decades and then in retirement the pension would pay them monthly until the end.
This all changed over the last thirty years. Yes, there are still pensions out there, but they are becoming extinct. Popular plans nowadays are represented by numbers. There are the 401K, the 457, 403 and many others.
Employees who are called participants in these plans are in charge of their destiny. If you want a pension (the new form), you have to save yourself out of your paycheck. How much?
Your decision. What is it invested in? Your decision. You are in charge, not Charles.
You see, pensions were fine when the average longevity of mankind was the mid-sixties. They could afford to pay an employee for that amount of time. Once advances in medicine and science occurred, pushing the average age to the eighties, the capability for these companies to pay a retiree for another twenty years disintegrated. Thus, we have a new model, save for yourself.
So, you all need to become savvier in your employer’s retirement plan. It is worth the cake.
What I mean by that is that most employers offer cake to employees to save for retirement.
Most that do this see it as a benefit to attract and retain their employees. Pay attention; it is called a “match.” The employer matches how much you save with certain limitations. There are two common types.
They both amount to the same but have different formulas on how you get there. The first one is referred to as a fifty percent (50%) match. For every one percent (1%) of your wages, you save they match it by fifty percent (50%). You put a dollar in; they put fifty cents. The limit is typically up to six percent of your wages. You wind up contributing six percent, and their match is three percent. Now, the other typical plan is called a dollar for dollar match. For every one percent (1%) of your wages, they match it with one percent (1%.) You put a dollar in; they put a dollar in. The maximum here is usually three percent. You put three; they put three.
So, both plans have your work putting an extra three percent (3%) of your pay in the retirement plan. It is literally an instant raise. As your pay goes up, so does this! Where else do you double your money without any risk? Actually, it winds up to be even better than that after you invest it. The longer you can do that for the better.
Now, when you change your contribution limits, go to six percent at least. I get it. This seems like a lot. What you don’t realize is that what you save is also from not paying taxes. For each dollar that you earn you pay taxes. Let’s say fifteen percent (15%.) So, after everything you walk away with eighty-five cents ($0.85.) If you reroute those dollars into your retirement account, you keep the fifteen cents ($0.15) by not having to pay taxes. This is why it is called tax-deferred or pre-tax. You may be in a higher tax bracket, which means the savings are even more significant that you get to eat in your retirement.
Log-in to your retirement account, understand what the match is to get your cake and then check up on what percentage you are contributing. At least max this out to get the free match, and I urge you to do more. I must disclose some employers do not match. It won’t hurt as much as you think since it’s before your deductions. Be happy; you can have your cake and eat it too.
Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management LLC, send questions or comments to [email protected].