By: Stephen Hill
Livingston & Hill Wealth Management, LLC
I know, you’re probably saying to yourself “Get in line”, after all the bills, taxes, daycare, tuition, etc. that we pay each month, there’s usually more month left after the paycheck. So, how in the world will I be able to “pay myself first?”
It’s actually much easier than you think, especially if you have a retirement plan available to you via your employer.
One of the golden rules of investing is paying yourself first through systematic investing. Payroll withdrawals are the most efficient way to start. In other words, the money gets taken out of your paycheck – and into your retirement savings – before you get the chance to spend it. And in most cases, the money comes out before it is taxed, making your paycheck go a just a little further, since less of it is taxed. It sounds simple enough, but you would be surprised how many people don’t do it!
The easiest way to do this is by actively participating in your employer’s retirement plan. These come in many forms and can be called different things, but they all are effectively the same in principal: they offer you a way to save for your retirement, allow those savings to grow tax-deferred (tax-free for ROTH contributions), and some employers even match your contributions up to a certain amount (usually 3%). Even if your employer does not match your contributions, it is still a good idea to participate. I cringe when I hear my clients say that they don’t participate because there is no match. It’s the habit of systematic saving that’s important; not how generous your employer is that counts.
It involves an easy 2 step process: you tell your HR person to withhold a pre-set amount (either as a percent of your pay or a dollar amount) and choose from a list of investment available in your plan. There will be a little bit of paperwork to fill out, but it is quick and painless. If it is a 401k or 403b, there will be a default fund available based on your age, so picking a fund will not be immediately important, as you can always change it later. For smaller plans (SEP-IRAs, SIMPLE’s), you will need to pick the funds on your own or consult with the advisor to the plan. When you pick an investment, keep in mind your tolerance for risk, your time horizon and your investment goals, i.e. how much you will need.
Start small and slowly increase your contributions anytime you can (at least annually). The goal is to eventually get to 10% or more – or even get to the maximum (currently between $17,500 and $23,000 for 401k/403bs – depending on your age). Some plans offer an automatic escalation feature, that let you increase your contribution by a preset amount each year to help you save even more. If you start now, and PAY YOURSELF FIRST, you will be off to a safe and happy retirement.
If by chance you do not have a plan at work, ask your boss if he/she will consider one. Some plans require little or no tax reporting (outside of normal payroll) and the costs are minimal. If they have questions or concerns, any financial advisor can guide them and offer them a plan best suited for their company. Or call me, and I can send you a list of available plans that fit your sized business.
So, no matter what type of plan your company offers – and whether your employer matches your contribution or not – paying yourself first will be the best thing you can do to save for your retirement.
Securities offered through Capitol Securities Management, Inc. Member FINRA / SIPC.
This information is provided solely for informational purposes. This information while believed to be accurate has not been verified or confirmed. Please consult your tax advisor before making any tax related decisions based on this information. Capitol Securities Management Inc is not responsible for this information
