First and foremost, congratulations! Landing a gig is a huge deal. Working and having sole responsibility for your finances is a milestone in ‘adulting’ that takes a lot of work to get accustomed to.
You’re likely binging Netflix docs and podcasts to become as financially literate as possible. There’s so much language and terminology to process that prioritizing subjects is challenging, but we recommend one- retirement. Retirement is the last thing on your mind as you enter the workforce, but it should be a priority since Gen Z intends to retire by age 59.
That said, we spoke to Sharon Fletcher, a Financial Advisor at Northwestern Mutual, to clarify a retirement fund and how to handle it. Therefore, you can move on to the next subject in peace, knowing you’ve solidified your plans to stop working while you just began!
More often than not, salaried or full-time roles offer benefits packages, including additional perks or compensation outside the base wage or salary. Most benefit packages provide retirement plans- this is the category a 401k falls under, the most common way people save for retirement.
“A traditional 401k is an employer-sponsored account that allows you to automatically save for retirement using pre-tax dollars from each paycheck,” explains Fletcher, “Pre-tax simply means the money is taken out of your check before taxes are paid.” Therefore, every two weeks (or however often you receive your check) before Uncle Sam (aka the government) takes their share, whichever percentage of your pay you dedicated to retirement, that will automatically be deducted and sent to an account you set up through your employer.
When onboarded for your new job, HR will host a meeting to explain your benefits package, including a conversation about retirement and establishing your account. During this meeting, Fletcher suggests you ask the following questions. “When can you begin contributing to the plan?” The reason to request that is that “some companies have a waiting period to begin participating.” You should also inquire about a “401k match.” Employees can contribute up to $22,500 a year for their retirement, and a company can match that, equalling up to $66,000 saved a year. Some employers do not offer a match, some will match you up to the max, and others will match slightly. It varies from employer to employer, so it’s vital to discover that during onboarding.
Another question is, “What are the average fees to the participant/employee?” Fletcher describes the fees as “little termites that can eat away your funds.” If the gross amount (the number before fees are taken out) contributed to a retirement plan is $227,000, but the fee for that account is 1.5 %, then you only made $163,000, as per this explainer developed by the U.S. Department of Labor. Once you know the answers, you’ll understand how to maximize your account. The decisions you make when opening a 401k will be automated, so once established, you only have to watch the fund grow over the years.
We realize we’re talking to Gen Zers, and the traditional ‘stay at one job and contribute to your 401k until you have enough to retire’ isn’t the most desired route. 40% of Gen Z would like to leave their jobs within two years, and 54% indicated they wanted to start their own company. Loyalty to jobs is slim, so how does that affect retirement packages? For those job hopping, the solution is simple. You can “roll over to your new employer’s 401K plan,” says Fletcher. Take the money earned from your previous employer and add it to the retirement package of your current place of employment. If you are working a full-time job, then decide to go self-employed, “you can always roll over to your solo 401K plan,” she elaborates.
Solo 401k?! Yes, this is an option. Freelancers, Entrepreneurs, or anyone that thrives in the gig economy can open a 401k without an employer. “Some of the best ways that solopreneurs can boost their financial health for the future are a traditional IRA, Roth IRA, Solo 401K, Roth 401K, or a SEP/Simple IRA.” There’s a plethora of plans available that you should consult a financial advisor about. Also, there’s an added benefit to this route. “If you are self-employed, You can contribute 25% of your net earnings. This is higher than the W2 contribution limit of 22,500 per year if younger than age 50,” Fletcher mentions. In layman’s terms, you can contribute more of your money to your retirement plan if you are self-employed than connected to an employer.
There you have it– an explanation of 401ks and how to prepare for retirement. Whichever financial institution your retirement account belongs to, set up an advisory meeting. Based on your income, you can work out numbers to determine how much. It would be wise to contribute depending on when you plan to stop working. Discovering more information about your package is free, so take advantage.