Do you remember your first job? I bet that job seems pretty shitty now that you’ve moved up, out, and onto better things right?
I’m not here to talk about the actual job you had, because retirement savings isn’t about whether you’re an engineer, sales person, or doctor, it’s about… the benjamins. It’s about making benjamin your first friend at work that sticks with you for life. Analogy too much? I’m talking about making money your best friend, early.
Sure, if you decide to work on Wall Street or for your parent’s successful business, that can impact how much you save and put aside yourself… but what’s important about your first job is whether you worked for a company where saving for retirement was a priority. A place where you learned about the importance of retirement saving, because believe me, it is (hella, hecka, supes, really) important.
I was talking to my friend who said that she is so thankful that she happened to work at Vanguard (a finance company) for her first few years of work because everyone was talking about their retirement plan. While my friend was not a finance major she was forced into an environment that made sure she learned how easy it is to save for retirement. It was almost “uncool” to not invest in your 401k.
This got me thinking. My friend, a non-finance person, got so lucky compared to others who don’t realize what “401k” means until their second or third job. What if she got a job that didn’t encourage her to learn about her retirement options? What if she just worked for years and years without saving a single penny? I know that I’m a finance nerd that works in the finance world, but the first thing I do when I get a job is ask, ‘How do I sign up for your retirement plan?’
So if you’re at your first job (or seventh) let’s get you all geeked out on your retirement and not miss another beat!
Look at the benefits as soon as you join a company – specifically their retirement options
Listen, they make you sit through the lousy presentation anyway, might as well catch the part that makes you a lot of money right? Ahem, like over $300,000 by the time I’m thirty kind of money, that is. There can be things in that presentation that are intimidating as well as boring, but here is what you need to know if you want to save the big bucks with minimal effort:
1. When are you eligible to start contributing to your retirement?
Contributing to your own retirement is as easy as signing up for it! This is when you get to tell your company how much money you want set aside from your paycheck for your retirement. You are generally eligible to contribute either immediately or 3-6 months from your first day. If your company doesn't have immediate enrollment, set a reminder in your calendar RIGHT NOW to check back-in with your HR Department when you’re eligible.
2. Do I qualify to contribute?
Depending on your employment there can be limiting factors like, hours worked per week, status with the company (full/part time), and your age. While these factors are rare for salaried employees just make sure your employer tells you if you qualify. No need to make it complicated. Just ask your HR, “Am I eligible today?”
Ok you’re in! You’ve got the job, you sat through the long presentations on benefits. Now go! SIGN UP FOR RETIREMENT! I mean, why wouldn’t you?
Well, I guess there is a lot of finance jargon that keeps you from taking the next steps. They use these big fancy words that tend to scare some people off – let’s go through those:
Terminology that makes no sense:
1. 'Maxing out’: When I’m maxed out I feel tired… Don’t, maxing out is amazing! As of 2018, the government allows you to contribute $18,500 to your employer retirement plan. If you have the means to get there – do it. Maxing out is the best way to save money. (Just don’t forget you can’t touch this money until your 59 ½ years old…gotta love the half years).
We like this. Matching is a good thing. Better than good! If your company matches, it means that they give you free money. WOAH, what? Yes, you read me correctly! Free money! Any dollar you contribute to your plan, they will match it up to a certain amount…. Huh? Up to a certain amount? What does that mean?
Scenario: Let’s say that your company matches ‘100% of every dollar up to 5% of your salary’. That means if you make $100,000 and contribute $5000 to your retirement (100,000 x .05), your employer will give you $5000 as well.
Let’s say you want to up your contribution game. If you contribute $6000 (6% of your $100,000 salary), that’s great! But will your company match it? That’s what matching is, right? In this scenario, if your company stated that they will only match up to 5% of your salary, then you will just get $5000 (5%) from your company. But don’t let it stop you, saving is saving!
What if you don’t want to contribute 5%? Say you can only contribute 4% of your salary.
If you contribute $4000 (4%), you will only get $4000 from your company. Note that they are still matching your investment, but they are matching at a lower rate because you’re only investing at a 4% rate as opposed to the highest matching rate of 5%.
So best to get the maximum match or more if you can. In this case that would be contributing at least $5000.
3. Vesting: I didn’t know wearing my Patagonia vest in the winter was a verb, but I dig it.
No, vesting is a term for when that “free money” actually becomes yours. My first employer had a 3 year vesting period. Huh!? What’s a vesting period?! That means that every dollar they matched to my 401k would only be mine if I stayed for 3 years. Employers do this to build loyalty. Said differently, if you’re vesting period is 3 years and you quit after 2.5 years all the money the company has matched for those 2.5 years goes back to the employer. What!? They stole my money! Woah woah, you still keep all of the money you contributed, just not the free money they matched. That said, some companies have no vesting period which is great!
This is by far the most intimidating aspect of retirement savings, and also why I started my business. What can I say?! I love a challenge! I get it, the investments are confusing and you have no idea what all the options mean. While the investment options vary per plan, usually you can find a “Target date fund” or “Retirement date fund”. If you see those, without any other expertise, go for ‘em. They are funds that have dates in them like “2035” or “2050”. Pick the fund that has a year you plan to retire. This will invest your money aggressively the farther you are from that date and eventually become more conservative as you get closer to your retirement date.
Listen there are many options for your retirement plan but you MUST invest, and not just leave it in cash. If you don’t invest, that $300,000 we talked about earlier will actually be closer to $100,000. At best. Hopefully there is someone who can talk to you about your investment options at work – if not, call me :)
Ok, let’s review:
1. When you get your first job (or second or third) ask about the retirement plan and how to sign up.
2. For God’s sake, SIGN UP!
3. Invest, invest, invest.
If you’re employer doesn’t already offer education on your retirement options, have your HR team reach out to me. I’m happy to help.