Luke’s Story: To 401(k), or Not to 401(k), That is the Question
Part I of III
“Luke” had been referred to me by another one of my clients. He needed guidance about his personal finances and saving for retirement. When we met, he told me that he has a 401(k) through his job, but is unsure if it’s the best place for his money. He is wondering if he should diversify his options beyond “pre-tax” savings. Luke also wanted to know what I thought about a life insurance investment plan pitched to him by a local insurance agent. Many people have questions about these same topics, so in this 3-part series, I’ll provide some general guidance for Luke’s (and my readers’) consideration.
Access to a Retirement Plan: If your employer offers a 401(k), 403(b), 457 or similar plan where you can invest through payroll deductions, please make the most of it. Luke is putting $30 a paycheck into his employer’s plan. For 2015, the employee contribution limit has been raised to $18,000 for most plans. And, if you are age 50 or older, you are permitted to make an additional, “catch-up” contribution of $6,000! I told Luke that I would not invest any of his money until he had made the maximum contribution permitted by his employer. These pre-tax plans are hard to beat because all the money goes to work without losing some to income taxes. The benefits of pre-tax, compound growth potential can be significant.
Get Excited about Retirement Investing: For those in their working years, it is neither too early, nor too late, to start contributing. Try putting aside whatever your employer will match and then increase your contribution as you can. Let’s say you put away $150 a month for ten years and you earn an average of 7% (after fees and expenses). After ten years, you’d have $26,000. After ten more, it’d be about $78,000! If you were to jack up your contribution to the 2015 annual max of $18,000, those numbers soar to $260,000 in ten years and $781,000 by twenty! Wow. Of course, we each need to find the level of contribution that fits our personal circumstances, but did I say, “Wow?!”
Personal Circumstances Caveat: I’m not suggesting that people put money into a retirement plan that is needed for other critical living expenses. Before getting aggressive about your contributions, I strongly recommend: 1. building up a 6-month cash emergency fund; 2. paying off any debt with a high interest rate (make it a priority to whittle down debts with 5% interest or higher); and 3. getting adequate health insurance (and long-term care insurance if you are age 50+).
I’ve run out of room! I’ll answer more of Luke’s questions next week.
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.