4Q2017 | Ages 18 – 29
Retirement Plans for Beginners
When I first started working at working at my job, I did not have a clue as to what a retirement plan was, why I should start contributing to it, and how it worked. I had just quit being a server, where my financial situation was basically making money and spending it in the same night. Four years later, I now understand how blissfully unaware I was of the importance of having access to, and saving for my retirement.
For starters, I did not understand the basic concept of retirement, and why my employer offered a retirement plan to me. A retirement plan is something that your employer may, or may not offer to you as a way to save money for when you retire. In order to retire, you need to have saved a certain amount of money to replace the current income you are earning due to being employed. There are a lot of suggestions out there, but the most common suggestion I see is that you need to replace 80% of your current income in retirement.
For example, if I was making $63,000 per year before retirement, I would expect to need around $44,000 – $57,000 per year in retirement.
Thankfully, one of the advantages to having access to a retirement plan, and one of the benefits of the company that I work for, means that my employer is willing to help me save for my retirement. They do this by “matching” my contributions. Employers offer a match as a benefit to working at the company, but they also add matching to encourage their employees to save more. Their formula for matching my company is as follows: 100% up to 3% + 50% of the next 2%.
|My Contribution||Employer’s Match|
|1%||1% or 100%|
|2%||2% or 100%|
|3%||3% or 100%|
|4%||3.5% or 50%|
|5%||4% or 50%|
I would be “maxing out my match” if I chose to defer 5% or more of my salary each pay period. It’s considered “maxing out” because I am no longer leaving any free money behind that my employer is offering to me.
Now, your employer may offer you a match, but that does mean it could come with a vesting schedule. My employer’s vesting schedule is simple – I am always 100% vested in any money that they contribute to my retirement account – but there are other companies who have a more complicated vesting schedule. A vesting schedule is a schedule set up by your employer to determine when you will have full ownership of the assets they have contributed to your retirement account. For example, your employer could offer a six-year vesting schedule:
|Years of Service||Vesting %|
With a six-year vesting schedule, you have to work at the company for six years in order to be 100% vested in the money your employer has given to you. If you were to leave the company after 4 years, and your employer had contributed $3,000 to your retirement account, then you would only be entitled to 60% of the $3,000, or $1,800.
Besides learning all of the logistics of a retirement plan, I think the most important thing I have learned would be that you need to save now rather than later. This may sound obvious to you, but I did not understand exactly how important this is. My financial advisor was able to help me understand by showing me the following graph:
As you can see, Employee A started saving at 25 years old, for 10 years, and only contributed a total amount of $16,000 to her retirement account. Employee B did not save as early; she started to save at 35 years of age, and after 30 years, contributed a total amount of $48,000. Even though Employee B saved more money, for a longer amount of time, she still ended up with less money than Employee A. Do you know why this is? I did not, but my financial advisor was able to explain the concept of compound interest: the profits you can make on your original investment, plus all of the profits earned on the interest that has accumulated overtime. Basically, it is the profit on profit.
I think one of the most important things I have learned from having access to a retirement account is that I also have access to a financial advisor at no cost. I did not learn all of the above by looking up definitions online and watching videos, I scheduled a meeting with my financial advisor to discuss and plan out my financial future. If you do not have access to a retirement plan, a meeting with a financial advisor could cost you around $100 per hour, depending on where you go. Not only is my financial advisor available to discuss what my retirement plan is, what an employer match is, how a vesting schedule works, and to explain the importance of saving early, but they also are available to talk to me about many other financial topics.
As always, we encourage you to talk to your financial advisor about any topics you may have questions on. You have nothing to lose, only knowledge to gain!
Plan Health Coordinator
Securities offered through Cambridge Investment Research, Inc., “Cambridge,” a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Prime Capital Investment Advisors, LLC. “Prime Capital,” a Registered Investment Advisor. Prime Capital doing business as Qualified Plan Advisors, “QPA,” 6201 College Blvd., 7th Floor | Overland Park, KS 66211 | p: 913.491.6226 | f: 913.491.3214 | primecap-ia.com | Cambridge and Prime Capital are not affiliated.
This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.