Houston Chronicle Sunday
Employer-offered 401(k) ideal way to begin savings journey
For most people starting a new full-time position, it often comes with a benefits package that features a retirement account such as a company-matched 401(k). According to Gary Busch, a certified financial planner and founder and principal of Busch Financial Planning, while Social Security can provide a base level of income, middle income and higher income Americans need to save a significant amount during their working years if they intend to maintain a similar standard of living in retirement.
“Money invested in early years has a long time to compound and grow,” Busch said.
Will Goodson, a financial advisor at Financial Synergies, an independent fee-only registered advisory firm specializing in wealth management, said financial planning and investment management for clients, having both a 401(k) and portfolio allows you to, from a tax perspective, be able to access money to live on during retirement. It also gives you more ability and choices to create a retirement income in the future.
“A company-offered 401(k) is a great option for people to start saving for the long term,” Goodson said. “We always encourage people at minimum to invest enough or contribute enough to at least get maximum amount the employer is willing to match. It’s essentially free money, in a sense, and the more you can put is the most beneficial. The more you save, the better off you’re able to be down the line.”
Goodson also stressed the benefits of tax savings when you contribute pre-tax dollars to a retirement plan for the future.
Skyler Denny, associate financial adviser at Financial Synergies, said it’s never too early for someone to start saving for retirement when they start their career.
“It’s very important to explore various opportunities, especially if you are wanting to retire early,” Denny said. “For these people, a 401(k) alone may not be the best option, because you have to be at least 59½ years old to be able to withdraw funds from it without incurring a penalty.
For these people, having a balanced portfolio with retirement assets and taxable assets will allow a client the maximum amount of flexibility in their late
working years and early years in retirement.”
If you’ve started saving later than you would like in your career, Denny and Goodson emphasized the fact that it’s still not too late. Many plans provide catch-up provisions. For example, if you’re at least 50 years old, you can put an additional $1,000 annually into an IRA and $6,000 into a 401(k).
“It’s also important to look at your lifestyle and determine what you can do to maximize the most amount of money you can save,” Goodson said. “It may be good to consider working a bit longer than you’d planned to if you haven’t been able to accumulate enough assets to let you live the way you want to live in retirement.”
One of the biggest mistakes people make when it comes to saving for retirement is not starting to save soon enough.
“That’s the biggest benefit,” Goodson said. “We tell prospective clients that we’re not going to be the ones to make them
wealthy. It takes years of work and discipline. If you start taking advantage of being able to save as early as possible, it’s not uncommon to end up being 50 years (old) with $1 to $2 million saved because you started saving early and took advantage of accounts and programs offered through an employer.”
“Another common misconception is that Social Security benefits will be enough. For most people, it’s not,” Busch said. “It’s also a misconception to think it’s hopeless and you’ll never save enough. Every little bit helps, especially when given time to grow. It’s OK to start out slowly if you haven’t been saving for retirement, but plan to increase the percentage saved annually until you reach your goal percentage.”
As far as how much to save on a general level, Goodson said the answer can vary, but a good rule of thumb for people is the 4 percent rule.
This rule is a benchmark for people who have an investment portfolio and can withdraw or
live on 4 percent or less of its total value.
“If you can do that, then there is a good chance of that money can last you through retirement, especially if you pair it with other income sources such as Social Security benefits, rental income or part-time jobs. ” he said. “This can serve as a good frame of reference of how much money could produce a substantial income in retirement.”
According to Goodson, for most people 401(k)s are automated, which means the money is coming right out of your paycheck. He encourages employees to take advantage of that if they can, and if they’ve done well and have maxed it out, they should consider looking at other vehicles, such as after-tax accounts, even if their contribution is as little as $20 to $100.
“Most investment accounts can be linked to a checking account so you can have an automatic transfer in the works to allow you to save little by little that will add up over time,” he said. “It’s never too late to start saving, and if you didn’t start saving from day 1, 10 percent of income is a good minimum place to start. You should consider it as delayed gratification. I’ve never met anyone who is mad they saved for later down the line.
Busch also urged people to not assume they don’t need to save because they will keep working and never retire.
“Personal health, workforce reductions, or the need to take care of an ill spouse or other relative may force you to stop working,” he said.
For more information about Financial Synergies, visit
www.finsyn.com. For Busch Financial Planning, visit buschfinancialplanning.com.