We are happy to share Agili’s latest video, Retirement Savings Tips, with recommendations for getting the most out of your 401(k) plan. A full transcript of the video, featuring Dan Honsberger, CFP®, is below in italics.
Hey Everybody! I’m Dan Honsberger, a Financial Strategist with Agili, here to talk a little bit about the importance of saving for retirement.
Burden of Saving for Retirement Rests on Employees
You know, it used to be the case that workers’ retirements were covered by an employer pension. You’d get a monthly payment over your lifetime, and often that benefit would continue for the rest of your spouse’s lifetime as well.
You know, the days of the pension are long gone for most of us. The obligation for retirement savings has shifted from the employer to the employee. It’s our job now to come up with monthly cashflow in retirement, and employer retirement plans, like a 401(k), 403(b), or 457, are fantastic tax-advantaged ways to accumulate wealth.
401(k) Retirement Saving Statistics
Did you know that 79% of Americans work for employers offering 401(k) plans, however only 41% of employees are enrolled in the plans? Hopefully you’re engaged and making at least a small contribution to your employer retirement plan.
401(k) Contribution Limits in 2022
In 2022, the most an employee can contribute to their 401(k) is $20,500. Those who are 50 or older are allowed an additional annual catch-up contribution of $6,500. Business owners can sometimes contribute even more.
There are always competing priorities for what to do with your paycheck. It’s important to include long-term savings in your priorities list. The goal is to live a comfortable lifestyle today, while also working to become “financially independent” and have the flexibility to scale back or stop working in retirement. The more you can prioritize long-term saving now, the more flexibility you create for yourself.
Getting the Most Out of Your 401(k) Plan
Since a 401(k) is a fantastic tax-advantaged way to save for retirement, I want to share a few ways to get the most out of your plan…
- First…Start saving early and in an automated way. Set up an automatic contribution from your paycheck to your 401(k) plan. After the Pension Protection Act was passed in 2006, some businesses began automatically enrolling employees in their 401(k) plans. Be sure to review your statement to make sure you’re saving enough money.
- Second…Take advantage of your employer’s match. An employer’s match is “free money” and a great way to boost savings. Be sure to save at least enough to get the full match, often four to five to six percent of your gross pay.
- Third…Increase contributions along with raises and promotions. This is a great way to increase contributions without eating into your take-home pay, an amount that you’ve become accustomed to. If, for example, you get a 2% salary increase, and increase your 401(k) contributions by 2%, you can still wind up with about the same take-home pay every month.
- Fourth…Do not use the account until retirement. Save for emergencies outside your 401(k) plan – three to six months’ worth of expenses is a good target for that. Prioritize saving for other goals alongside your retirement – whether it’s buying a home, paying for a wedding, your kids’ education, or other items. Remember that while you can take a mortgage out to buy a house, you can’t take out a loan to pay for your retirement.
- Fifth…Invest in low-cost diversified mutual funds and exchange-traded funds (or ETFs). If you are a “set-it -and-forget-it” investor, equities (both US and international stocks) have a great long-term track record for rate of return. If large swings up and down in the market are hard for you to stomach, it’s a good idea to have an allocation to bonds, also known as fixed income. Pay attention to minimizing the expense ratio of your investment funds. This can have a really significant impact on long-term returns.
Finally, I recommend that you do your best to follow Warren Buffet’s wise advice, “Do not save what is left after spending, but spend what is left after saving.” If you do, you’ll not only build up a nice retirement nest egg, but you’ll also gain peace of mind. “Future you” will appreciate it!
Thanks for your time. And for more information, visit Agili’s website (www.AgiliPersonalCFO.com).