Shocking Reality of 401(k) Saving
I have likely spoken to thousands of 401(k) participants over the past four to five years, in either group meetings or in one-on-one review meetings. The shocking revelation I received is the fundamentals of 401(k) saving do not change. These best practices, when exercised in a healthy financial environment, can assist a family in accomplishing their retirement goals.
When I find myself in front of participants, I do not preach the gospel of 401(k)s… I preach saving and preparing for life events. Your company’s retirement plan is only one of the many tools that you can use to accomplish your goals. Regardless of whether you save in 401(k)s, IRAs, ROTHs, real estate, or other vehicles, the main goal is to earmark dollars for retirement.
So, the beginning of any conversation is always, “Where do you want to go? What do you want to do? How are you going to get there?” Amazingly, if you login to your 401(k)’s website, you are normally provided all the tools you need to calculate and model your current financial position and what steps you need to take to replace a portion, or all, of your current income in retirement. We are all moving somewhere in life. All retirement plan participants should determine where they want to go and develop a plan to get there.
Most well laid plans can easily be undermined if we fail to build the proper foundation. The foundation needed in this case is paved with margin. Margin is the space you build between your needs and wants, and it provides the proper footing to establish your financial plan. We recommend striving to live on 75% to 80% of your family’s gross income. This will make available 20% to 25% of your gross income to save for retirement, for college, for rainy day funds, or for charitable undertakings. This may require a period of reducing your spend rate, snowballing credit card debt, or increasing earning ability. Once the margin is built, it will provide the capacity to fund present and future needs and wants.
In the meantime, develop the habit of savings. A saving plan normally works best when it is automated. “We should automate the important.” In normal situations, automating savings moves it from a manual undertaking to an automatic arrangement which puts it out of mind, out of sight. When we do this, we adjust our standard of living accordingly, and then move on with our lives. Experts say we need to earmark 10%-15% of our gross income towards retirement. How do we do this? Start somewhere, anywhere. And then increase your contribution 1% every six-months or annually. So, how do we get to a 10%-15% savings rate, “1% at a time”.
These foundational 401(k) savings tips can be applied almost universally across the 401k landscape. Developing a financial plan to live your best life, building in the foundation of margin, and developing the habit of saving provides a firm footing to reach our retirement goals. We are all headed towards a date where we will need to live on a stream of income. Becoming good savers today will make the journey and destination better.
Article by: ANTHONY MCCALLISTER, AIF®, J.D.
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CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.
