Fix Your Retirement Plan: Simple Tips for a Secure Future
Tom and Janice Morton are a married couple in their early 30s with three young children. They’ve been doing an excellent job saving for their children’s education, but they’ve done little to prepare for their own retirement. Tom has a stable job earning $75,000 per year, and they have excellent credit, always paying their bills on time. However, they never seem to have any money left over at the end of the month to save and invest. Moreover, Tom doesn’t utilize the 401(k) plan offered at his workplace. Let's dive into the mistakes they are making and how they can fix them.
Key Mistakes the Mortons Are Making
Not Utilizing the 401(k) Plan
Explanation: A 401(k) plan is a retirement savings plan sponsored by an employer. It allows employees to invest a portion of their paycheck before taxes are taken out. The contributions are tax-free, and the earnings are tax-deferred until you start taking money out in retirement.
Example: If Tom contributes 5% of his salary ($3,750 annually) to his 401(k), and his employer matches up to 3%, he would receive an additional $2,250 per year. This is essentially free money that Tom is currently missing out on.
Not Paying Themselves First
Explanation: Paying yourself first means putting a portion of your income into savings or investments before you pay any other bills. This strategy helps ensure that you save and invest consistently.
Example: If the Mortons set up an automatic transfer of $500 from each paycheck into a retirement account, they would be prioritizing their future financial security. They would then budget their remaining income for other expenses.
Steps to Fix These Mistakes
Start Contributing to the 401(k) Plan
Actionable Step: Tom should sign up for his workplace 401(k) plan and start contributing at least enough to get the full employer match. This will maximize the benefit from the employer's contributions.
Example: If Tom's employer matches up to 3%, Tom should contribute at least 3% of his salary. This way, Tom would contribute $2,250 annually, and his employer would add another $2,250.
Automate Savings
Actionable Step: Set up an automatic transfer of a fixed amount from Tom's paycheck to a retirement account. This ensures that savings happen before they have a chance to spend the money elsewhere.
Example: Automatically transfer $500 from each paycheck into a retirement account. This would result in saving $12,000 annually.
Reevaluate Budget and Expenses
Actionable Step: Review their monthly expenses and identify areas where they can cut back. This can help free up more money for savings and investments.
Example: The Mortons can look at discretionary spending like dining out or subscription services and reduce these expenses. They might find an extra $200-$300 per month that can be redirected into their retirement savings.
Why These Changes Matter
By making these adjustments, the Mortons can significantly improve their retirement outlook. Here’s why:
Long-Term Growth: Investing in a 401(k) with employer matching and automatic savings can significantly grow over time due to compound interest.
Financial Security: Ensuring consistent savings helps build a safety net for the future.
Peace of Mind: Knowing they are preparing for retirement can reduce financial stress and provide peace of mind.
Conclusion
The Mortons have a sufficient income to live comfortably and still prepare for the future. By prioritizing their retirement savings, utilizing Tom’s 401(k) plan, and automating their savings, they can set themselves up for a secure financial future. Remember, it’s never too early to start saving for retirement. Evaluate your own retirement plans and make adjustments as needed to ensure you are on the right track.