In today’s world of high-end investments and low-risk diversification, many graduates entering the professional workforce are not aware of how to maximize their financial portfolio. This includes being aware of investment opportunities that are available to prepare for retirement, such as 401(k) plans.
Raymond Epps, 24, a senior philosophy student from Jackson, Miss., said he believes that most of his peers are aware of the importance of retirement plans. “The point of working is to be financially stable to retire when you are ready,” Epps said. A 401(k) plan is a company-sponsored retirement plan for employees. Employees can contribute funds to their 401(k) plan monthly, which are deducted from their paychecks. The 401(k) plan allows employees to save money on a pre-taxed basis. Therefore, all 401(k) contributions are not taxed until money is withdrawn. Saving money via a 401(k) plan will lower taxable income and allow you to pay less to Uncle Sam.
It is in the best interest of employees to seek employment with a company that will match the employee’s contributions to their plan. “Most companies will match your funds on a dollar-for-dollar basis up to 3 percent of the employee’s salary,” said Greg Buchanan, a financial planner from Fidelity Investment.
According to Buchanan, if a company offers to match the amount employees contribute, then employees should take advantage of their offer. “It’s really foolish to pass that up. It’s just like if you were walking down the street and saw a $20 bill, you will pick it up,” agreed Craig Reeder, accounting instructor in the School of Business & Industry.
The employee will have the alternative to decide how much he or she can add and where to invest their contributions, Buchanan said. At some companies, the maximum an employee can invest is $15,000 a year. The employer should provide a list of funds in which employees can invest. Most plans propose stocks, bonds and money market funds.
A high percentage of employees’ 401(k) plans allow them to take up to 50 percent of their savings in loans from the money in their account. The length of time a person has to repay their loan is five years. If you fail to repay any amount, a penalty will occur with 10 percent early withdrawal penalty. At the age of 59.5 you may begin withdrawing funds from your account without an early withdrawal penalty. By law, one of the 401(k) plan requirements is that people begin extracting money from their 401(k) plan by the age of 70.5. A deferment is obtainable if you are still an employee working full-time with the company that sponsors your 401(k).
When interviewing for jobs, be sure to ask the employer what kinds of retirement plans they offer. Never assume your job might not have a 401(k) plan. “If you bag groceries at the local grocery store, chances are they offer a 401(k) plan,” said Ben Welter, a financial advisor of Hancock Investment Services.
Although many students are not employed or do not have a job that offers the 401(k) plan, students can begin saving for retirement now. Statistics estimate that an individual will need at least 70 percent of annual gross income to maintain the same standard of living once you stop working. Social Security alone will not supply this level of income for most people.
“The biggest mistake people make is they don’t start early enough,” Welter said.
Unlike most people, Stacey Simon, a sophomore general studies student from Franklin Park, N.J., has already considered her financial future. “I’m very interested in investing stock and bonds and seeking employment that reaps great retirement benefits,” said Simon, 19. “Preparing for retirement is very important to me and my future family.”
Whether you are retiring at age 30 or 60, it is never too early to start saving for retirement. 401(k) plans can be an important asset and play a large role in anyone’s financial future.