Planning for retirement is a critical financial decision that will greatly affect how you are able to spend your golden years. Unfortunately, many people in the workforce lack the knowledge and resources needed to make informed decisions about how to save for their retirement.
One way employers help employees with their retirement funds is by offering savings plans as part of their benefits package. Additionally, employers play a role in guiding employees toward a more lucrative retirement by offering valuable resources, such as educational materials, workshops, and third-party tools.
Below, we explore retirement planning and provide tips on what employees should know in order to secure their futures post-employment.
Tip 1: Understand the Basics of Retirement Savings
The best approach to an enriched retirement is to have a plan and follow it through.
For most, Social Security alone is not enough to cover retirement expenses, and expenses must be supplemented through a retirement savings account. Those who begin saving early get to take advantage of compound interest, which can lead to improved financial independence when it comes time to access the funds.
Retirement plans, like a Traditional IRA, Roth IRA, or 401(k), offer tax benefits. This allows investors to maximize their savings.
Tip 2: Know Your Employer-Sponsored Retirement Plans
Many employers offer a retirement savings plan as part of their benefits package. They do this in an effort to make working for them more appealing, lower turnover, and look out for their employees.
While there are many types of retirement plans and options, the most common ones employers offer are:
1. 401(k)
With a 401(k), employees contribute pre-tax dollars, which reduces their taxable income. Some employers match employee contributions up to a certain percentage, which is a great way to get free money you can use when you retire.
These funds grow tax-deferred until you go to withdraw the money. Roth 401(k)s allow for optional after-tax contributions with tax-free withdrawals in retirement.
2. 403(b)
Similar to a 401(k), but designed for nonprofit and educational sector employees, a 403(b) offers catch-up contributions for long-term employees. This plan provides for tax-deferred, Roth, and employer-matching options.
3. SIMPLE IRA
Savings Incentive Match Plan for Employees, also known as a SIMPLE IRA, is often a great option for small businesses as they're easier to set up and manage when compared to a 401(k), for example.
With a SIMPLE IRA, employer contributions are mandatory at either a two percent fixed contribution or a three percent matching contribution. Employee contributions are pre-tax, Roth, and the funds grow tax-deferred.
4. SEP IRA
A Simplified Employee Pension (SEP) IRA, as the name suggests, is designed for self-employed individuals and is often provided by small business owners. Only the employer can contribute to each employee's account.
Self-employed individuals with SEP IRAs are allowed to make higher contributions, as limits are greatly increased compared to traditional IRAs. You can put up to 25 percent of your compensation or $69,000 (whichever is lower) per year, tax-deferred. This is significant when considering Traditional and Roth IRAs limit contributions to $7,000 ($8,000 if 50 or older) per annum.
5. Pension
Pensions used to be the norm, but nowadays, most workers are only offered one of the aforementioned retirement plans. While much less common, some government and union jobs still offer them as part of their benefits packages.
A pension plan has its own advantages. For example, they provide a guaranteed income stream for retirees that is based on their former salary and the number of years they dedicated to the company.
Employers fund the plan, reducing employee risk. For employers considering offering pension plans, it's advisable to speak with a financial advisor to help navigate options and choose the plan that is most beneficial for all parties.
Tip 3: Grasp the Role of Employer Matching Contributions
Employer matching contributions are an extremely beneficial perk to any job as this contribution provides free money that helps employees reach their retirement goals faster. It's common for employers to match a percentage of an employee's contributions up to a certain amount.
You may find that some companies match up to 100 percent of a certain percentage of the employee's compensation. For example, an employer might match 100 percent of contributions on the first three percent of deferred compensation plus a 50 percent match on deferrals for the next two percent.
However, only 21 percent of companies match employee contributions dollar for dollar. The average employer match is around 4.5 percent to 5.5 percent of an employee's salary.
Tip 4: Spot Tax Advantages of Retirement Plans
One of the biggest incentives for employees to embrace retirement savings is the tax benefits that come along with it. While we've already touched on this, the following is a breakdown of the tax advantages of saving for retirement.
Traditional 401(k), 403(b), and SIMPLE IRA: Contributions are made pre-tax, which reduces taxable income.
Roth 401(k): Contributions are made after tax, which allows for tax-free withdrawals when you retire.
Tax-deferred growth: Employees don’t pay taxes on investment gains until they withdraw money.
Employer contributions: Tax-deductible as a business expense.
Tip 5: Set Contribution Goals
Knowing how much you should contribute towards your retirement fund is another important aspect of saving money that employers should be aware of. As a rule of thumb, 15 percent of one's total salary should go towards your retirement savings.
The best way to ensure this happens is to set up automatic payroll deductions.
It's also recommended that as your income grows, so too should the percentage of your annual income that you set aside for retirement. You can take advantage of catch-up contributions if you are late to the retirement saving game and over 50. As per the IRS, annual catch-up contributions up to $7,500 are permitted by these plans:
- 401(k) (other than a SIMPLE 401(k))
- 403(b)
- SARSEP
- Governmental 457(b)
And starting in 2025, some employer 401(k) plans may allow you to make a “super” catch-up of $3,750 if you are between the ages of 60 - 63. Check if this is an option in your plan.
It's a good idea to review and adjust your contributions on an annual basis to ensure your saving goals stay on track.
Tip 6: Recognize Investment Options & Risk Tolerance
A lot of retirement plans allow employees to choose from different investment options, including stocks, bonds, and mutual funds, to name a few.
Here are a few things you might find useful when considering risk mitigation:
- Employees can diversify their investments;
- Younger employees can take on more risk with higher stock allocations; and
- Older employees can benefit from conservative investments, especially as they get closer to their retirement.
Note that some retirement plans offer target-date funds. This is an automatically adjusted investment based on the employee’s anticipated retirement date.
Take the Next Step to Secure Your Future
Is planning for your retirement weighing heavy on your mind? If so, it's a good thing that you are concerned about how you will fund your golden years. In this article, we provided a number of useful tips that should help readers understand the different types of retirement plans and how to maximize contributions. However, there are many intricacies that may apply to some that require a professional financial advisor's assistance.
If you feel that your retirement saving effort has room for improvement, please reach out to Benefit & Financial Strategies today to speak with a licensed advisor.