Building Your Largest Paycheck Ever

 By Jeff Herman

 

For most people, starting a new job or entering the workforce for the first time can be a stressful yet exciting period in their life.  There are many nuances to learn about the new company, and the new retirement plan is one of them.  According to the US Dept. of Labor, approximately 30 percent of eligible workers do not participate in their companies’ 401K type retirement plan.  And those that do participate may be making some significant mistakes that could have negative consequences in preparing for retirement.  While there may be several reasons, this is unfortunate as many people will need to create their own retirement nest egg to supplement any Social Security Benefits.  What steps can be taken to help ensure a comfortable retirement?

Start Early and Pay Yourself First

There are many distractions that can prevent you from contributing to your retirement plan, but starting early will have a dramatic impact later in life.  The secret is that your contributions are made with pre-tax dollars and taken directly out of your paycheck.  By having the money directly pulled from your check you are “paying yourself first” and creating a good long term habit.

Many companies that offer a 401K type retirement plan also offer a company matching program with a minimum level of participation from the employee.  In simple terms, the company may contribute to your retirement plan if you contribute a small amount as well.  Typically, if the employee contributes 5% the company will match that amount with another 3%.  Although each company will have different percentage levels, this is essentially free money and you will need to participate to enjoy the benefits.  Don’t leave free money on the table.

In another “pay yourself first” model, consider increasing your contributions throughout your working life.  For example, many employees increase their contribution percent every time they are given a raise.  This is another denial of instant gratification, but one that should create rewards later in life.

Let’s take a quick look at the cost of delaying your retirement contributions.  According to the American Funds retirement planning center if an employee has a starting salary of $30,000 and receives 4% annual raises while earning 8% on their investments they may amass $276,000 over a 30 work life.  But if you wait just 5 years to contribute that amount would only be $206,000.  That’s a $70,000 reduction for waiting.  Don’t delay, start your retirement savings now.

Learn/Understand the Investment Options

Having made the decision to contribute to your company’s retirement, plan you must take the next step and help it grow by monitoring the results.  A lot of employees don’t understand their plans’ investment options or are afraid of making a mistake, so they take no action and leave the money in a stable value account.  Of course, this is a conservative approach to protecting your investment, but the chance of outpacing inflation is very low.

A better option would be to check with your company or plan administrator to find out if a target date fund is available.  Target date funds are designed to create a balanced portfolio with a specific ratio of stocks to bonds.  This ratio will change the percentage holdings to more bonds as you age and move closer to your retirement date.  While this is not a bad option, it is not built for an individual’s specific situation or risk tolerance.

Since this is your retirement nest egg, the best action to take is to monitor your portfolio and make changes as your situation or the markets dictate.  Most company plans have multiple investment options available, and you can move your dollars between these funds on a systematic basis.  It may take some time on your part to better understand the investment options available, but it could mean a big difference in the outcome when you reach your retirement date. Don’t understand or need clarification on how the options work?  Visit with a financial advisor.

Becoming a Retirement Manager

Now you are a retiree with carefree days ahead of you.  But wait, you still have one very important title….retirement manager.  That’s right, you will need to manage your retirement funds to last the remainder of your life.  So you must read/learn about how specific investments work in different markets

One of the most important tasks will be converting your retirement dollars into an income stream.  There are quite a few investment programs that can offer you an income stream for life.  The options range from Government Bonds to Dividend paying stocks to Real Estate.  You just want to make sure the investment fits your individual risk tolerance and income needs.

Lastly, you will need to monitor & react to the changing markets.  Very few investments can be considered “forever”, so this means you will want to monitor the performance of your accounts and react to any changes.

Soliciting Professional Advice

As you can see, building your largest paycheck ever is not something to ignore, nor is it something that can be done once.  It takes time, energy and a willingness to learn in order to build a sizeable retirement nest egg.  Don’t have the time?  Not sure where to start?  Ask a professional, financial advisor.  In our firm, we are eager to help people realize their financial goals and enjoy a stress free retirement.

 

Jeff Herman, a 25 year veteran of the financial services industry, is an Equity Partner with Wagner Wealth Management.  He can be reached by email at [email protected]. Securities offered through Triad Advisors, Member FINRA/SIPC. Advisory Services offered through Wealth Management Advisors. Wealth Management Advisors is not affiliated with Triad Advisors.