Quarterly Report: Saving for Retirement

We’re back again with another post on money! Before we dive in, can I tell you a secret? Before I got married, I used to tell my boyfriend (now husband) that because I was Latina I didn’t need to save for retirement–my kids would take care of me, obvi. Of course, I was joking, but the idea that family helps our viejitos is so deeply entrenched that I never really gave much thought about saving for the long-haul. But then as I learned more and more about gender inequity, the wage gap, and saw how poverty continues to afflict women, I realized that saving for retirement at an early age is a vital step in retaining financial freedom (and power) even when I’m an abuelita.  So, here’s what the Money Man has to say:

If you’re still trying to think of some goals for 2015, please make sure that one of your financial goals for the year is taking advantage of your employer’s 401(k) program. If you already participate, then make sure to review your plan to ensure that you are reaping all of the benefits your employer offers.

To clarify, there are typically two types of 401(k)s: a traditional 401(k) that contributes pre-tax income to a retirement account or a Roth 401(k) which uses after-tax income. My examples below are based upon a traditional 401(k). Generally, it makes more financial sense to postpone paying taxes while your money earns interest. You eventually will pay the taxes once you begin to withdraw the funds during your retirement. The reason why it’s better to delay the tax bill is because, generally speaking, most people will be in a lower tax bracket once they’re retired than when they earned that income, thus saving money in the long run.

A 401(k) has many advantages aside from being able to save your money without taxes being deducted. Through these plans, you can also control where you invest. This may not seem like a huge perk, but don’t you want a say in where and how your money is used? Controlling (and learning about) your investment is a huge step in being active in your retirement. Finally, if you decide to leave your employer, you can either roll your plan over to an individual retirement account (IRA) and take advantage of broader investment opportunities, or leave it within your former employer’s 401(k) plan.

So what are some steps to take to prep for retirement?

One. Sign up for your 401(k). Most employers offer a 401(k), or if you work for a non-profit these are commonly referred to as a 403(b), there is no difference; only in the name. A 401(k) is a retirement savings plan sponsored by employers that lets employees save money before taxes are removed from your check. To encourage individuals to save money, some companies may automatically enroll you into the plan (usually at 3% of your salary) However, for many others, you will need to take the initiative and sign up for your plan. For 2015, the maximum amount you can contribute to a 401(k) is $18,000, but there is no minimum contribution, so save whatever you can handle in your current budget. The idea is to get into the habit of participating in your retirement savings.

Two. Determine incentives. Another benefit that many employers offer is to match your contributions to incentivize you to save for your retirement. Sometimes this could be a flat 5% of your salary up to a certain dollar amount, or they may match 15% of whatever you contribute. Take advantage of this! It’s basically free money.

Here is a simple example of the tax savings you may receive through matching:

Lets say you are a single, recent law school graduate who lands job for $50,000 a year. If you contribute 10% of your salary to a 401(k) or $5,000, your pre-tax income for the year would be $45,000. Your federal tax owed based upon the 2014 IRS tax bracket tables would amount to $7,113. If you had not saved that money, you would have owed $8,363, a difference of $1,250. Now lets say that your employer will match your contributions dollar for dollar up to 5% of your salary (5% X $50,000 = $2,500). This means your firm would contribute an additional $2,500 to your 401(k) and effectively add 50% to your retirement balance just for saving for retirement.

So this savings can really add up and it’s important to know what and how much is available to you to strengthen your retirement fund.

Three. Make retirement savings a priority. Unfortunately, many young professionals think that retirement is years away so why bother to save right now? This is flawed logic because if you can afford to contribute to your retirement now, then you’re earning more money in the long-run, and you won’t have to save as much money going forward. How is this possible? The answer: compounding. Essentially the sooner you start to save, the more your money will grow, and by the time you’re ready to retire, you’ll have a much larger financial nest egg. This may mean that you have to sacrifice now in order to save for the future. You may also need to factor in things like medicare costs so that you can be sure that, should you need it, you’ll be able to get help with hospital bills once you’re retired. It may not be easy, but if you can find a way, you should do it because if you think earning a living is hard as a young professional–try doing it as an octogenarian.

Overall, remember that your goal should be to make your money work for you. By taking advantages of pre-tax benefits and learning about your investments, you’re putting yourself on the right track for a more comfortable, less dependent, and hopefully financially autonomous future.