Helping employees save for retirement goes beyond simply offering a 401k retirement plan. Consider sharing these eight tips to support their efforts.
- Save early, save often. Step one is getting started. No matter what an employee’s age they should save for retirement. For example, let’s assume you start putting $416 per month ($5,000 a year) in a tax-deferred retirement account that earns an average of 8% per year. Save for 40 years, and you’ll amass $1.3 million. Save for 30 and you’ll have just $566,416.
- Make it automatic. Employees should have a set amount of money taken automatically from their paycheck and deposited in their 401k’s.
- More is better. If they’re not at the point where they’re maxing out they’re contributions, they should be sure to increase the amount they save from their paycheck at each open enrollment period. Increasing retirement contributions is easier than they might think. Employees need to understand that for tax-deferred accounts, each dollar of additional contribution will only cost them about $0.70, depending on their tax bracket. Another easy approach some might want to take is to use a portion of their pay raise or bonus each year to boost their contributions.
- Maximize their tax break. Traditional 401k plans allow employees to defer paying income tax on the money they save for retirement. Investors can contribute up to $17,500 to a 401k plan in 2013. After age 50, the limit jumps to $23,000.
- Tell them to take our money “ please! If employees are debating how much to start saving or how much to increase their savings, they should at least make the minimum amount enough to receive the maximum employer match. This is free money and it’s an important benefit many employees overlook.
- Diversify. Employees should not concentrate all their funds in only a few or very similar investments. Plan sponsors should make it clear to employees that best practice calls for choosing a mix of stocks and funds appropriate for their risk tolerance. They should also periodically rebalance their portfolio to meet their target allocation.
- Tell them to keep their day job. Even professional traders can’t always time the markets. Employees should be dissuaded from actively trading their account. Markets will move, sometimes violently. However, employees should be reminded to never forget that their timetable is years or even decades away.
- Stay the course. Employees need to understand the importance of patience. Communications should stress that employees are best served if they keep their money in the plan, and avoid loans and withdrawals. Taxes and penalties can shave up to 50 percent from their distributions. Early withdrawals also cause employees to miss out on valuable compound interest, which is essential for building a large nest egg.