Does your employer offer a company retirement plan? Do you contribute to your employer sponsored retirement plan?
After you have established your emergency fund, we would like to see you begin contributing to some sort of employer sponsored plan. This is assuming that you are working in a regular job and that the company offers a plan with some sort of company match. What’s the match? It is a carrot offered by the company (typically) where some of your contribution percentage is matched.
For example, if you agree to put aside 4% of your salary, you may get a (free) match of 2%. Or maybe 8% leads to a 4% match. Sometimes the match is capped; you might get 4% matched for 8%, but if you go up to 10% you still get 4%.
We would like you to go to Human Resources’ internal webpage (or your hiring documents) and determine what your plan is and how much can be matched. You will probably have a 401(k) or 503(b). We will focus on the “Traditional”, not Roth, options, as we want you to get a tax break this year for these contributions. If you’re outside the US, most countries have similar tax-sheltered options.
We would like to see you start contributing what you can, but try to move up to enough to get the full match, but not more, yet. This “payout” won’t be as painful as you think as these are pre-tax dollars, similar to your health insurance premiums. You will have to pay taxes on this income eventually when you are in retirement. Calculate from your gross pay each pay period how much 1%, 2%, 5%, etc., would cost, and see if you can take that from your budget. These will be pre-tax dollars, so your paycheck won’t be reduced as much as you might think.
For now, we would like to see you invest this money into a target retirement mutual fund. Your target is next year? We know. Very funny. Let’s take your age around 65 for now. If you are 22 in 2022, pick the 2065 fund.
Caveats: You will not be able to take this money out until you are 59.5 years old, with some exceptions. You will pay normal income taxes when you take the money out (in retirement).
Can you get started? Do you need help? Leave us some comments.
