What You Need to Know About Retirement Savings in Your First Job (and Every One After That)•
How to make smart long-term financial decisions from Day 1.
According to Wells Fargo’s 2016 millennial survey, 69% of millennials think having a retirement plan is “extremely” or “very” important – but just half actually have one.
For many millennials, saving for retirement is convoluted and diluted alongside other new job logistics.
But retirement savings aren’t actually that complicated. If new employees knew how crucial and straight-forward they are long term, everyone would opt-in immediately.
Here’s what you need to know:
Of the 130,000 companies on kununu, 45% of them offer a 401(k) contribution plan.
Most simply, 401(k)s are retirement savings accounts typically offered by employers. Depending on the plan, you can either choose to participate in a 401(k) plan, and what percentage to contribute; or, a specified percentage of your income is automatically withdrawn from your paycheck each month without being taxed, and then invested through your (401(k)) account. If your 401(k) plan is with your company, you’ll probably have a certain number of investment options to choose from.
According to kununu’s data, 31% of companies will match your 401(k) plan. This means they’ll mirror your contributions to your 401(k) up to a certain percentage. The percentage they match usually ranges from 3-8% of your income. If your employer’s 401(k) plan offers a dollar to dollar match up to 5% of compensation, and you make $50,000 a year, then both you and your employer would each contribute $2,500, so each year you’d be adding $5,000 to your 401(k). kununu recommends putting aside up to the maximum of what your employer matches – so if your employer matches up to 5% of your compensation, then you should, at minimum, defer 5% of your compensation to take full advantage of the match.
When you retire, you’ll get access to not only what you initially contributed to your 401(k) but also what your employer contributed and gains from the stock market – a significant amount when accrued over 30-40 years. When you withdraw money, you’ll pay taxes on it.
What if you leave your company before you retire, as most millennials will? Then you can “roll over” your 401(k), which means moving your savings to a 401(k) with your new employer. Rolling over is easy; just make sure to request a direct rollover to avoid taxes and penalties for withdrawing before retirement. Sadly, people often forget to roll over their 401(k)s from company to company, which can result in fees or losing track of the money.
If you don’t get a 401(k) match from your employer, or if you’re self employed, it may be wise to open a Roth IRA instead or as well.
Roth IRAs are taxed going into the account but then not taxed later when you withdraw money in retirement. This can work to your benefit, as young people early in their careers tend to be in a lower tax bracket.
So if you anticipate your tax bracket being higher when you retire than it is now, whether for political or professional reasons, a Roth IRA could be a smart choice. Or, if you think your tax bracket will be lower when you retire – perhaps because you plan to live exclusively off your savings after a certain age or don’t anticipate substantial, separate incomes from the stock market – then a 401(k) may make more sense.
While 401(k)s tend to lower your taxable income and therefore save you money upfront, a Roth IRA enables your savings to grow tax-free throughout your life. Furthermore, because Roth IRAs don’t reduce your taxable income like a 401(k) might (because your contributions are taxed along with your income each year), “a Roth account can force you to save more for later by leaving less in your pocket now,” Matt Kenigsberg, Vice President of Financial Solutions at Fidelity, explained.
Finally, a Roth IRA is easier to access pre-retirement than a 401(k) if you find yourself in a cash crunch. You can access the principle – what you put into it, not the interest that accrued afterward – at any time without paying fees or taxes.
You can contribute up to $5,500 a year to a Roth IRA. If you want to save more than that annually, you could open a 401(k), too. Also note that sometimes 401(k) plans offer a Roth feature, which allows you to contribute post-tax instead of pre-tax, depending on the plan.
Stay ahead of the game
It’s important to know how your employer operates employee retirement plans. Many kununu reviewers pointed out that they weren’t eligible for a 401(k) until a year of working at a given company. Or some companies only match 401(k)s on December 31st of each year so, according to one employee, “If you get laid off before then, you get zero matching.”
Other employees reported that they didn’t receive timely information on retirement benefits, so they missed deadlines for signing up. One Starbucks employee lamented, “In theory, I should have had a health plan and 401K for working at Starbucks – but there was only a set time in the year when you could apply for them, and it was so hectic that no one informed me or walked me through the steps on how to get one.”
Clarify your company’s retirement savings procedure before you take the job, or in your first couple weeks of employment, so you don’t miss deadlines and can make informed decisions.
Secondly, make sure your employer follows through on what they promise. One kununu reviewer complained, “We were told that we would be receiving insurance, profit sharing, and 401k. We never received insurance or profit sharing. 401k money was deducted from my check, but there was never any money deposited into my 401k account.” This scenario could easily be addressed by the employee: If you notice money isn’t getting deposited into your 401(k) account, or other issues, follow up with HR or the appropriate contact immediately. This shouldn’t happen, and companies can face major penalties for withholding contributions.
Start it and then leave it
Research shows that the more retirement options young adults have to choose from, the less likely they are to sign up for any. This is tragic due to one simple principle: compound interest.
Wells Fargo’s study offers this example:
A millennial earns a starting salary of $32,000 at age 23, saves 5% the first year and then increases her savings rate by 2% each year until she reaches a 13% annual savings rate. Assuming she receives a 2% salary increase annually and her investments yield a 7% return, the millennial will have $1,217,206 in retirement savings by age 65. If she starts the same process at age 32, however, she’ll have just $602,096 in savings by age 65 – a 51% percent difference!
Cecelia Crossen, a financial analyst, told me, “the most powerful force helping people retire successfully is time – young people frequently feel like they can’t afford to save for retirement (think: crushing debt burden from college, having low paying jobs but living in expensive cities, etc.) but in reality, they can’t afford NOT to.”
If your employer offers a 401(k) match, it’s especially important to contribute in order to earn free money. Merrill Edge’s blog explains, “Most people don’t walk past money on the ground without picking it up, but that’s what people do every day when they don’t contribute enough to their 401(k) to get the full company match.”
When Wells Fargo asked millennials why they started saving for retirement, nearly a quarter said that “they know that if they start to save early they’ll have more money when they retire.” Another 18% were motivated by the employer match.
How much should you save?
Forty-four percent of millennial employees surveyed by Wells Fargo are saving 1-5% of their income. Thirty-three percent save 6-10% of their income. Ideally, aim to put aside between 6-15% of your income for retirement savings. The more, the better.
With both commitment to overcoming the initial logistical hurdle and patience, new employees can establish savvy habits that protect their financial well-being from day 1 to year 100.
Caroline Beaton (@cs_beaton) is kununu’s millennial career expert. She’s an award-winning writer and entrepreneur who helps ambitious millennials change their habits and behaviors to lead more fulfilling lives. Her writing has been has been featured in Forbes, Psychology Today, Business Insider and many others.