March 27, 2014
Retirement might not be on your radar right now, especially if you’re still getting established in your career. During these early years, you’re probably focused on salary, work environment, location and so on. And of course, you may have to take the job offers you can get.
On average, only about half the employees in a company sign up for offered retirement benefits. This is a shame for those employees because—as this article will explain—it means they’re leaving thousands of dollars in free money on the table. The good news is that you can take active steps to research retirement plans, make sure you’re getting a reasonably good deal and take full advantage of the free money and tax protection that a solid retirement plan provides.
Recognize your reasons
It’s easier to commit to saving for retirement and keep an eye out for the juiciest retirement plans if you realize just how much you stand to earn by taking advantage of certain programs. You might be surprised to learn how much your savings can multiply if you stash away now. So let’s start with a quick and painless calculation.
Let’s say, for instance, that you’re 25 years old, making $20,000 per year, putting just 10 percent of your salary each month into an interest-earning account. Keep that up, and you could have saved $1.8 million by retirement age. Plug your own figures into a retirement calculator, and you’ll see how little effort it takes to build sizable wealth over the course of your career as long as you start early, contribute consistently and keep your savings in an account that earns interest.
“You just can’t beat compound interest,” said John Oldham of Retirement Income Designs. “As Einstein himself once said, “He who understands it, earns it, and he who doesn’t, pays it.” The simple rule of compound interest shows the true value of having time on your side.”
Take note of some tools
Your savings will grow even more quickly if you opt in to the matching retirement contribution plans offered by many employers (you’ll find out how to investigate this in the next two sections) and max out your own portion of the contributions. In a typical matching contribution plan, an employer will put 50 cents into your retirement fund for every dollar you contribute out of your paycheck for, up to six percent of your total salary.
That means if you’re making $50,000 a year and putting away six percent of it ($3,000 per year), the employer will contribute an additional $1,500 per year out of its own pocket—not out of your paycheck—if you’re signed up for this plan. So why not max out your contribution percentage and get as much free money as you can?
Many employers put these retirement contributions into an interest-earning account known as a 401(k). You can supplement this by putting your own money into an Individual Retirement Account or IRA. Money in an IRA cannot be taxed while it’s in the account and will not be taxed when you withdraw it at retirement age. What’s more, money in an IRA earns interest, which piles up over the years. As you can see from a IRA calculator, an IRA that you start from scratch at age 25 that receives $5,000 per year will be worth more than a tax-free $1.2 million by the time you’re 67.
“You can’t get any better than knowing ahead of time what your worst possible tax-paying situation is,” says Peter D’Arruda, CEO of Capital Financial Advisory Group. “So the sooner you can start ‘locking in’ your tax-free savings, the better.”
Compare across companies
A little legwork can give you a general idea of what kinds of retirement benefits you can expect from employers in various fields as well as from specific employers. This article, for example, lists Chesapeake Energy, Devon Energy and Qualcomm (among others) as employers with excellent retirement benefits. This article, meanwhile, explains that employees in the public sector, as well as those who work for very large companies, tend to get some of the best retirement packages.
“As a general rule, many companies have been cutting retirement benefits,” Oldham says.
Many of these cuts were cost-saving moves during the 2008 recession, but quite a few employers have been reluctant to bring them back even after the economy stabilized.
“When so many people are looking for any work that’ll pay the rent,” Oldham said, “companies don’t have as much incentive to lure new employees with enticing retirement plans. A job with no retirement benefits is better than no job at all.”
During your job search, use Google to research companies for which you’d like to work. Try searching for terms like “[name of company] + retirement plan” or “[name of company] + retirement benefits,” and you might find that your prospective employer shares its retirement offerings online. If you’re able to dig up this info, it can help you make a decision between two or more appealing employers. If your search doesn’t turn up anything, you’ll have some important questions to ask once you score an interview.
Ask in interviews
Determining what types of retirement packages are offered by various employers can take some maneuvering during the interview process. For one thing, many career coaches will tell you to avoid delving into the topic of benefits too deeply during interviews, since a long list of benefits-related questions can make you appear more interested in your own future than in the value you bring to the employer.
Even so, asking a few strategic questions in each interview can net you a general outline of a company’s benefits. An ideal time to ask these questions is toward the end of the interview, when the interviewer asks, “So, do you have any questions for us?”
Keep your questions brief and specific, emphasizing that you’re interested because you can envision a long future with the company. Do they offer a 401(k) or other retirement plan at all? In the current economic climate, some employers have quit offering retirement plans altogether, and a complete lack of one can be a red flag. If the company does offer a retirement plan, do they offer matching contributions? Other positive signs are offers of profit-sharing (additional contributions based on company profits) or pension plans (lifelong retirement benefits after a certain number of years with the company).
You don’t need to delve into all of these topics during an interview. One or two well-worded questions can usually distinguish a retirement-conscious employer from a stingy one. If the company’s employees are proud of the retirement benefits their employer offers, you can bet they’ll brag about those benefits when asked.
Whether you’re rapidly rising in the ranks or just starting to build up your resume, an early start on retirement planning will pay off exponentially down the road. Accumulating a million bucks or more doesn’t take much on your part, just a little research and a long-term commitment to saving. If your employer doesn’t offer retirement benefits, or even if you’re between jobs right now, stashing just 10 percent of your monthly budget in an IRA will create a financial cushion for tougher times. So take a few minutes to check out your options and start taking advantage of the ones available to you. Your future self will thank you.