It finally happened: You got a job! It’s full time and has all the things your parents have been talking to you about for months — benefits, paid vacation, great culture, a company retirement plan, and employer matching.
After you call your parents, your SO and your BFF and post some witty, celebratory post on social media, you’ll realize that lots of paperwork awaits you. And you think “What is all this? I thought we were trying to reduce our footprint! Does a retirement plan even apply to me? And what’s an employer match?”
Stay calm. Fill out those forms and check those boxes, and make sure to pay special attention to the details of your retirement plan.
Wait, what?! Retirement? Didn’t I just start working?
We get it. Retirement may not be high on your priority list of things to think about right now, but getting into the habit of saving will help you take care of one of your biggest long-term financial responsibilities. The most important thing to do is just START. Once you make the decision to begin contributing, the money will come out of your paycheck before it even hits your bank account. The beauty of this is that it’s basically automated. Your financial business will be taken care of for you.
Benefits of employer-sponsored retirement plans:
- Employer contributions/matching: This is easy money. A match is when your employer matches some portion of what you save for retirement. It could be a 100% match up to a certain point or it could be 25% of what you contribute. The average match is around 3%. Every plan is different so make sure to read the fine print.
Here’s an example. If your employer offers a 100% match on the first 3% of your contributions, you can take full advantage of it by contributing at least 3%. If you do that, 6% will go into your retirement account – but you’re personally only contributing 3%. Your employer contributes the rest. Are you following? Don’t worry, you’ll see what we mean!
- Tax-deferred savings: Most retirement plans offer tax-deferred contributions. That means you won’t pay any taxes on the money you’re contributing to the account or on the growth within the account until a later date. Trust us – that’s more good news! Here are the IRS rules.
- Early withdraw penalties: Ok, wait a second. Explain to me how a penalty is a benefit? There is a 10% penalty for withdrawing funds prior to age 59 ½ — so it creates a barrier to accessing the funds until you retire. If you decide you want a new camera or desperately need a European vacation, you’d better find that money elsewhere. Of course, there are always some exceptions.
What to ask about your employer’s retirement plan?
Keep in mind that your employer has an obligation to provide the details about their retirement plan to you so that you can make smart, informed choices. Here are a few questions to get you started:
- Does the company provide a retirement plan match?
- If there is a match, how does it work? Do I need to contribute a certain amount of my salary to receive a match? What is the maximum match the company will provide?
- When can I start contributing?
- Who can I contact if I have questions about the investments offered?
- Is there a vesting period? You may be unfamiliar with the term “vesting period.” (Psst: A vesting period is the amount of time you must remain employed at the company for the money your employer puts in your retirement account to be yours).
Company retirement plans can be intimidating, but they don’t have to be. If you don’t understand what you’re reading, ask. If you still don’t understand, keep asking until you do. What seem like minor decisions today can have a major impact on your financial future. If you have questions about your employee retirement package – please shoot us an email or give us a call. We can help, too!