Dear Carrie: I'm 28 and have a good job. My company offers a 401(k), but I haven't signed up yet — mostly because I don't understand if it's the best move. I know I should be saving for retirement, but it seems so far in the future, and I have other things I need to cover. Also, I probably won't stay with this company forever, so it seems like maybe an individual retirement account is the better way to go. Can you help me decide? — A Reader
Dear Reader: This is a great question, and I especially like the way that you are thoughtfully weighing your options. It's interesting that despite the stereotype that millennials focus on the here and now, an April 2019 survey from the Transamerica Center for Retirement Studies found that your generation is, in fact, getting a good start on retirement, with 74% saving through an employer-sponsored or similar plan.
To me, that makes a lot of sense. There's no better way to continue having the freedom you want than socking money away for the future. That's not to say it's easy. Student debt is an especially heavy burden on your generation — and it's often a balancing act between paying today's bills and saving for tomorrow's goals.
But there is a way to do it, and the sooner you get started the better.
Your Company-Sponsored 401(k) Is Your Best Bet for Getting Started
Even with other money obligations tugging on you, I believe retirement needs to be a high priority. And contributing to a tax-advantaged 401(k) is a great way to get started right away. At your age, you can end up with a pretty good nest egg by saving just 10% to 15% of your annual salary during your working years. However, if you delay saving (or want to take an early retirement), that percentage will need to go up — in a big way.
If your company matches your contributions, that should just seal the deal. Let's say it matches up to 6% of your salary. In this case, you'd want to contribute at least that much to get the full match. Otherwise, you'd be turning away free money! For the record, the 2019 401(k) annual contribution limit is $19,000.
And if you don't stay with your employer forever, don't worry. You'll likely have the option to take your 401(k) with you to your next job. If not, you can roll it over into an IRA when you leave.
However, do ask about the vesting schedule for the company match. Some 401(k) matching contributions vest immediately, but some companies require that you stay a certain number of years to get the entire match. That's something to keep in mind if you consider changing jobs. You won't forfeit your contributions regardless of how early you leave, but you might give up some — or all — of the employer contributions based on their vesting schedule. But regardless of vesting schedule, it still makes sense to save for your future.
To Roth or Not ... Get the Details
Before you sign up, find out if your company offers a traditional 401(k), a Roth 401(k) or both. The difference between the two is when you pay income taxes. You don't pay income taxes upfront on contributions to a traditional 401(k). But while earnings grow tax-deferred, distributions — which you can start taking penalty-free at age 59 1/2 — are taxed as ordinary income. With a Roth 401(k), contributions are after-tax, but qualified withdrawals of both contributions and earnings are tax-free, which can be a huge benefit down the road.
If you have the choice, I'd seriously consider going with a Roth. Starting in your 20s, it's likely that you're currently in a lower tax bracket than you will be later. That means the tax deduction of a traditional 401(k) now could be far less advantageous than getting tax-free distributions at retirement.
You could also have the best of both worlds by dividing your contribution between a traditional 401(k) and a Roth 401(k), if that's an option. If not now, that could be a good strategy as your salary and retirement savings grow.
Expand Your Savings With an IRA
Another bit of good news is that it's not an either/or situation. You can have both a 401(k) and an IRA. Again, you have a choice between a traditional IRA and a Roth IRA.
You can contribute the annual maximum to your IRA (currently $6,000) on top of what you contribute to your 401(k), so one potential strategy is to first contribute to your 401(k) up to the company match and then put any added savings in your IRA. An IRA may offer you additional control and investment choices compared to your 401(k).
However, there are a couple of potential gotchas here. In 2019, a single filer must earn less than $122,000 to be eligible for a full Roth contribution (phasing out up to $137,000). If you are married filing a joint return, you must earn less than $193,000 for a full contribution (phasing out up to $203,000). Similarly, depending on your income and your income tax filing status, you may or may not be able to deduct your traditional IRA contribution.
Take Advantage of Investing Technology
Saving is only part of the equation; investing is the other. With a 401(k), you'll likely have a number of preset investment choices. But with an IRA, you're on your own. And as challenging as it can be to choose saving for retirement over spending today, successfully navigating an investment strategy on your own can be even more difficult. Fortunately, with today's technology, you don't have to do it all yourself.
Many financial services companies offer low- or even no-cost automated assistance, often referred to as robo-advisers, to help you build a portfolio that reflects your personal goals and timeframe. The process usually involves answering a series of questions online designed to help you automatically build, monitor and rebalance your investments.
Make Retirement a Priority Even Though It's Far Away
Regarding your comment about other financial obligations, setting some priorities can help keep you from feeling overwhelmed. Here are my suggestions:
1. Save enough in your 401(k) to capture the company match.
2. Make sure you're paying at least the minimum on any student loans.
3. Pay down credit card debt.
4. Build an emergency fund.
5. Save some more for retirement.
Millennials face a different financial world than previous generations, with perhaps more challenges. But you have more options to help you be self-reliant, especially when it comes to retirement. Whether you stay with your current employer or set off on your own in the future, you have choices. Your choice to start saving for retirement now is the best way to ensure you can continue to choose your own path.
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