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The A B C’s of Setting Up Your 401(k)

 the money nerve

The ABC’s of Setting Up Your 401(k)

What is a 401(k)?

Essentially, a 401(k) is a retirement savings plan sponsored by an employer. This plan allows workers to select whether they want a larger paycheck now or to defer some of their money by saving and investing a portion of revenue from their paycheck before taxes are taken out. Different from pension plans where companies managed employees assets, 401 (k)s give workers more autonomy to manage their retirement funds.

Matching Funds, Take It! It’s Free Money.

Many companies also match contributions, often with a 3% or 6% cap. With this type of 401(k) account, taxes are paid when a person begins to withdraw money. If you put in 3% of your $50,000 salary, or $1,500, your company puts another $1,500 in the pot. You can add more than that $1,500 yourself, but the company won’t match beyond 3%.

What is the best type of 401 (k) to open?

Choosing whether to use a Roth 401(k) or a Traditional 401(k) is often determined by age and by salary level. If you are in a higher tax bracket, you may prefer lowering your salary by investing now and paying taxes later, thus the traditional approach may work best. For many people already in a lower tax bracket, it may make more sense to open a Roth 401(k) where you pay the taxes now. This plan also offers some qualified tax-free withdrawals. Just be sure to select a beneficiary or the person who gets your money if you die when you set up your 401(k). And, find out the percentage of fees for your account. You want to keep that below 1 % for maximum savings power.

How Much Can I Invest?

For 2017, the maximum amount of compensation that an employee can defer to a 401(k) plan is $18,000. Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000 for a total of $24,000. The maximum allowable employer/employee joint contribution limit remains at $53,000 for 2016 and $54,000 for 2017 (or $59,000 for those aged 50 and older). The employer component includes matching contributions, non-elective contributions, and profit-sharing contributions. Via Investopedia

401(k) resources

This 401(k) calculator can help you figure out how much you should be saving
The 401(k) fee analyzer can show you how the investment fees in your plan stack up to others
The NerdWallet IRA vs. 401(k) guide can help you maximize your retirement savings dollars in both types of accounts at once

Make it Easy to Save
Make your 401(k) contributions automatically. You can even set up your plan to raise your level of saving each year. The more automated your financial plan is – the more likely you are to have a substantial nest egg when you get ready to retire! Check out this list of investing and saving hacks.

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Being Honest

take-an-honest-lookBeing Honest
It is challenging for many people to discuss feelings of financial fear without a sense of shame. Behind closed doors, people may open up about their feelings and embarrassment and be honest about their current financial situation. By voicing their fears or shame, many people feel as though a weight has been lifted and can then take stock of where they are; to formulate a plan to get financially fit.

Financial shame often comes from not living up to a particular ideal. It may be a false expectation or a false belief. The banker “tells” you that you can afford the monthly payment for a brand new home. The car dealership points out that you can purchase a new car and keep your payments the same. Ads on television “sell” us a dream: we deserve to have all the “things” we want now. You may believe you should own a big home, multiple cars and provide for all of your extended family, but perhaps you lost your job, and that is no longer possible. Many of us live with an illusion of the sort of person we should be (or what we should have) rather than being honest about our situation.

It is smart to have an accurate benchmark for what you consider to be a healthy financial goal or lifestyle. For example, you may want to have 500,000 dollars in your retirement savings account as your measure of being financially healthy. Not meeting that benchmark doesn’t mean you are a bad person. However, it may result in a different outcome. If you have 485,000 dollars in your savings account, don’t beat yourself up over the difference, but if you only have $45,000 saved for retirement when you turn 65, be prepared to live on a lot less than you are used to. You are delusional if you think you can postpone saving and live in better style than you do now.

Most people imagine that their retirement will be even better than their current situation and will live exactly as they do now — if not better! But the reality is that many of us have not saved enough money to make those dreams come true. Now is the time to keep feathering the nest. Make an appointment with your CPA or a financial coach who can help you assess your net worth and develop and a plan for staying financially fit. Creating an honest budget and reevaluating what is important long-term may change some of your choices today. Our current cultural and political mindset of deserving it all now and never stopping to say, “I can’t afford that,” isn’t doing you any favors. Set yourself apart, be honest with your money choices. You can do it. You can live abundantly for many years to come.

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Focus on Your Future

the money nerve

Have you ever heard Aesop’s fable about the grasshopper and the ant?

The grasshopper loved hopping about and singing during the warm summer. One day he saw an ant working hard to move an ear of corn and cried out, “Why in the world are you collecting food on this bright and beautiful day? Stay and play with me!” The ant shook his head and said, “I am saving this for the cold winter, and you should do the same.” The grasshopper laughed and went off to play but perished during cold weather. The moral of the story: It is best to prepare for the days of necessity.

The story seems harsh, and many people wish for a fairy tale ending where others solve all of our financial dreams (i.e., winning the lottery, getting an inheritance, marrying a rich spouse). In 1934, Disney created the delightful film short “The Grasshopper and the Ants” where the Ant Queen and her colony felt pity for the grasshopper and took him in during the winter. Have you ever seen the video? Check it out below.

Sometimes a project or goal seems so far away that it is easy to procrastinate. There is so much time left and we get bogged down in our busy-ness, that daily decisions feel more urgent and important than long-term investments in life.

Reality check: It’s your life; it’s your money! How are your plans for retirement going? Do you have savings for a rainy day? Life happens – when you least expect it.

Saving and spending are part of living a life of abundance. Let’s change the words being used from short-term desires like “I need those shoes” to some long-term goals such as, “I am making better choices with my money, to maintain my lifestyle when I get older.” As you discover the best balance between living for today like the grasshopper and stashing some wealth like the ant, you will come to realize that both are investments in yourself.

Ignoring regular maintenance on your car because you don’t want to spend the money can result in major car expenses down the line. In the same way, poor spending or saving habits may also result in a later retirement and fewer choices down the road. What should you do?

Here are three easy ways to get started:
1. Take the quarterly plan you created last week and imagine retirement is a “big purchase” like a house.
2. Determine the price of this long-term goal (the amount of money needed) with this calculator.
3. Tweak your quarterly plan (budget) to begin investing toward your targeted “quality of life” in your later years. You will be glad you decided to invest in yourself!