“Tell me and I forget, teach me and I remember, involve me and I learn.” Benjamin Franklin
Because the new year is a good time for reflection, this column’s previous two recommendations included establishing a budget and determining dollar amount goals for three “buckets:” emergency savings, debt repayment and retirement savings. The goal was to assist readers in assessing their financial health by following these simple steps.
For those covered by an employer-sponsored retirement plan, the actionable item for January was to review the plan’s summary plan description and then to identify how much money (usually on a percentage basis) is being contributed annually by the individual and how much money the company has committed to contributing and/or matching.
If the percentage withheld from your pay is below the maximum amount being matched by the employer, consider increasing your withholding percentage immediately to get the extra benefit of the employer contribution. If you are already receiving the maximum match from the employer, consider increasing your withholding percentage until it totals between 10 to 20% of pay. A good time to increase this amount is after a pay raise.
The plan’s recordkeeper often has calculators available on their websites that can be used interactively to determine the optimal amount to allocate for retirement depending upon your age and the plan’s provisions. Actionable item for February: Login to the website and use their tools to learn more.
Another tool to help save for retirement includes a self-funded individual retirement account (IRA). Tax laws provide many types of IRAs, but the two major ones that individuals can establish are the traditional IRA and the Roth IRA. Contributions to a traditional IRA can be tax-deductible depending on income restrictions or non-deductible if income is over a certain limit.
The main attraction of the traditional IRA is that the money you place in the account grows tax-deferred and eliminates the payment of income and capital gains each year — like in a brokerage account — until you take a withdrawal, which will be taxable income. The Roth IRA has similar tax-deferred benefits, but the contributions are not tax deductible in the year that the contribution is made. However, the major attraction of the Roth is that withdrawals from it are not taxable. There are also provisions for a working spouse to contribute to either type in the name of a non-working spouse with little or no income.
For small business owners who would like to assist their employees with saving for retirement, they can take advantage of two types of IRAs that offer similar benefits as the traditional or Roth IRA. A Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE) IRA. Both types come with employer restrictions to ensure that employees are treated fairly, but the contribution limit amounts can be significantly higher than if individuals wanted to fund it on their own.
Brokerage firms such as Fidelity, Charles Schwab and Vanguard provide greater details regarding each type of offering and online applications.
For readers who want to conduct more research on ideas mentioned in this column, Morningstar.com is an excellent resource. To learn more about actionable items mentioned this month, there is a tab on the homepage titled “Plan” and “Save for Retirement” suggestions.
Next month: How should I invest my retirement savings?
Spoiler Alert: the advice will not include gambling on individual stocks that are recommended by people you do not know on the Internet.
Beth Stegner Peabody is CEO of Stegner Investment Associates, Inc., and a graduate of Sacred Heart Academy.