Frontwave Blog

Making the Most of Your Retirement Plan

Gone are the days of pensions and guaranteed retirement benefits for most American workers. Many employers have shifted instead to employee-directed retirement plans like 401(k)s or 403(b)s. Even the government now has its own version of a 401(k), called the Thrift Savings Plan (TSP), for military members and other federal employees.

If you’re one of the tens of millions of workers now in the driver’s seat of your retirement savings, it’s important to understand how your plan works and how to make the most of it. Fortunately, whether you’re just starting out or counting down the last few years to retirement, there’s a lot you can do to potentially increase your savings.

Save early, save often.

Experts like to say that saving for retirement is a marathon, not a sprint. The longer you have to save and invest your money, the more it will have the chance to grow. Your best bet is to start saving as early as you can and to contribute as much as you can. Got a new job? Sign up for your employer’s retirement plan as soon as you’re eligible. No employer plan available to you? Look into opening your own IRA or money market account.

Once established, aim to make regular contributions to your retirement account — for example, setting aside a certain percentage of each paycheck or a set amount each month. Keep in mind that contributions to a 401(k), 403(b) or TSP can be deducted automatically from your paycheck, generally on a pre-tax basis. Doing so may help lower how much you owe in taxes* — and make you less likely to skip a contribution. In our experience, you’re also less likely to miss the money when it’s taken out before you see it hit your bank account!

Max out your employer’s match.

One question a lot of people ask is how much they should be saving for retirement. The answer often depends on your age and retirement goals, and sometimes even which expert you ask. But there’s one thing nearly everyone can agree on: at a minimum, you should save enough to max out your employer’s match.

Many employers offer to match 401(k) and 403(b) contributions up to a certain amount or percentage of your salary. Say your employer offers a dollar-for-dollar match on up to 3% of your salary. This means if you contribute at least 3% of your salary toward your retirement plan, they’ll add another 3% on top — effectively doubling your retirement savings! While meeting an employer match may feel like a stretch on the wallet for some, think about it this way: not maxing it out is basically leaving money on the table.

The same goes for the military’s blended retirement system, which includes one-part annuity (like a pension) and one-part 401(k) — in this case called a TSP. Since most service members don’t stay in the military long enough to qualify for the traditional annuity benefits, the government added the TSP to the military retirement system in 2018 to allow service members to save for retirement and take that savings with them when they separate.

Today, anyone who joins the military automatically gets enrolled in TSP, and those who joined before January 1, 2018 have the option to enroll. After 60 days, the government starts to contribute 1% of the enrollee’s basic pay each month to their TSP. This is automatic, so the service member doesn’t have to contribute anything to get it. But after 2 years, a new matching option kicks in, where the government will match the service member’s contributions dollar-for-dollar up to an additional 4% of their basic pay. So if you contribute 5% of your basic pay each month, the government will give you another 5% on top of that. That’s free money you can take with you even if the military doesn’t end up being your long-term career.

Consider supplemental accounts and catch-up contributions.

For most people, simply maxing out an employer match won’t be enough to build a big enough retirement nest egg. They’ll have to contribute more, up to the maximum allowable contribution. That may be enough if you start saving young. But if you get a later start, say opening your first retirement account at age 45, saving $19,500 a year (the 401(k) contribution limit for those under 50 in 2020) may not be enough.

The good news is that if you want to save more than that, you don’t have to settle for the meager returns on a savings account. You can open an IRA and contribute up to another $6,000 (in 2020). A money market account, while not tax-advantaged, may be another option for boosting your nest egg.

Over 50? Consider taking advantage of “catch up” contributions. These allow you to save thousands more each year as you get closer to retirement age. In 2020, people 50 and older can save up to an additional $6,500 in their 401(k) and up to $1,000 extra in an IRA. Keep in mind, these catch-up contributions don’t have to be part of your automatic pre-tax deductions throughout the year. For example, if you find yourself with a big tax return or company bonus at any time during the year, you can contribute that to your retirement plan.

Get expert advice.

Planning for your financial future involves a lot of decision making. That’s why it’s a good idea to get advice from a financial professional. Ask your employer about resources they may have available, or give us a call at 800.736.4500 to learn more about working with a retirement planning professional.

*Consult a qualified tax professional for more information.