Work with me on this analogy.
There are many pieces to a puzzle. Imagine that the puzzle you are putting together is your financial well-being.
When you are putting the first few puzzle pieces in place, it is challenging to know where to start, especially when you can’t see the bigger picture. As you continue to work on the puzzle it becomes clearer and, at times, easier. And sometimes you’ve been working at it so long that you lose a puzzle piece here and there.
This blog has two parts: one for the early stages in creating your financial well-being, and a second part, for the later stages, when you need to find those missing pieces and continue to build your financial well-being.
Part 1. Getting started.
What would you say is the best piece of financial advice one could give a young adult when they get their first paycheck? Create a budget? Pay off loans? Start investing? These are all great, but where does one start?
Here’s the simple answer: Save. More complicated answer: Create a habit of saving…now.
“Saving 10% of what you earn is a must. If everyone did just that, starting with their first job, they would be in great financial shape,” says Troy Daum of Wealth Analytics, a firm specializing in helping people transition from working to retiring.
It may sound like a daunting task and feel a bit uncomfortable, yet your financial well-being can’t wait. There’s a simple way to get started. Here we go!
One of the easiest ways to save is to enroll in your company’s retirement savings plan. Period. (If you know a family member or a friend who needs to hear this, stop reading this blog and go help them enroll.) A company retirement plan could be titled: 401(k), 403(b), 457(b), Defined Benefit Plan, or Defined Contribution Plan.
Why? Contributions to a company retirement plan are removed before you get your paycheck, and they are not taxed. Savings made easy! You never miss what you never had. You develop a lifestyle around a certain income. Also, employers often match your contribution. This is FREE money. Another reason is that these funds are invested automatically and grow tax-free until retirement. No further action required in the short-term.
The Bureau of Labor Statistics reports that 59% of employed Americans have access to a retirement benefits plan, yet only 32% of Americans are contributing. Federal laws and companies are trying to make it easier and simpler to ‘opt in’ to company retirement plans. In fact, there’s a movement to instead make employees ‘opt out’ of the company retirement plan rather than ‘opt in’. Brilliant. Saving for retirement could be the ‘if one does nothing’ default in our future.
If your employer doesn’t offer a retirement savings plan – bummer! – another great way to save is to open a Roth IRA or traditional IRA and contribute the maximum amount (IRS site). Set up your contributions to be automatic. Now when it comes to deciding which type of IRA to open, and then how to invest these funds wisely, speaking with a trusted financial advisor would be helpful.
Why? Contributions to a traditional IRA are tax-deductible (IRS site). The investments within an IRA or Roth IRA grow tax-free. You will be taxed on IRA distributions in retirement, but not Roth IRA distributions. This IRA or Roth IRA is your savings account in retirement. It can be used to create a predictable monthly income stream when your paycheck ceases and work is optional.
In both options, the goal is to automate savings. Pay yourself first. Take your mind and emotions out of the task of saving.
Here’s a scenario to get you motived to start right away. It demonstrates the concept of compounding interest.
“Let’s say you start investing in the market at $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years. Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly. Who will have more money saved up in the end? Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.”
Part 2. – Pulling it together.
You are past your first job and onto your second, third…tenth. It is possible you were wise and enrolled in each company’s retirement plan. Excellent. It is also possible that you don’t know where those retirement funds are. You are not alone.
It is estimated that half of workers who change jobs leave money behind in a previous employer’s plan, even those with large balances. With Covid-19 and the shifting economy, there has been an increase in job mobility, and with that, an increase in the possibility of leaving even more money behind. According to the National Association of Plan Advisors, as of 2013, there was $1 trillion sitting in orphaned retirement accounts. Companies are required to mail abandoned funds to the participant’s last known address, and if the owner can’t be found, then the assets must be relinquished to the state.
How do I know if there’s money out there that belongs to me?
The best method to find company retirement accounts that you think you may have contributed to would be to call your former employer to track down your plan. You might need the dates of when you worked at the company, in addition to your personal information, to obtain access to your account. Or if you have old statements, you could contact the plan administrator directly.
There are also websites you can find on the internet that search for lost money or unclaimed property. Although there is not yet a federal database where you can search securely, here are a few good links to check out:
National Registry of Unclaimed Retirement Benefits – use this secure search to see if your employer has listed you as a missing participant: https://www.unclaimedretirementbenefits.com/
Missing Money – State and Provinces working together to return your lost funds – https://missingmoney.com/
National Association of Unclaimed Property Administrators – use the interactive map to go directly to the official government unclaimed property program for the state or province – https://unclaimed.org/search/
Have fun searching every site and state! We would love to hear your success story – firstname.lastname@example.org.
Why do you want to find these accounts ASAP?
- There’s a risk that the company will go under, the plan will be terminated, and then the challenge of tracking down your plan is magnified.
- Fees can eat away at a conservatively invested account, and abandoned accounts are invested conservatively.
- Your investment strategy changes with your age, your situation, and your goals. What was appropriate in your 20’s may not align with your strategy in your 40’s.
- You are probably not as diversified as you think. The number of accounts you have isn’t proportional to the degree of diversification, as one may think. You (or a trusted financial advisor) will need to analyze each account to determine if you are truly diversified overall.
How do I consolidate my retirement accounts?
- If you have moved companies, you can roll an old 401(k) plan into your current 401(k) plan if the plan allows this. In this case, the plan administrator can guide you.
- If you no longer work for the company, you can also rollover these funds into an Individual Retirement Account (IRA). This is not a taxable event. You will then have complete control over what you invest in, and not be limited by the plan choices. Again, your age, situation, risk tolerance and goals will drive your investment portfolio. If you are paralyzed by the thought of learning how to apply these factors to your retirement nest egg (or just don’t want to spend time on this), you can employ the service of a trusted financial advisor. This is what they do every day, and they actually love doing it. It’s a win-win!
There are many pieces to the puzzle of financial well-being. We hope that you will get started right away and help your loved ones get started right away, too. We hope that along the way you do not lose any pieces in the process, but if you do, there are ways to find them.
Putting this puzzle together is not always easy, and the options can seem endless. If you would like the help and guidance of a financial advisor, we invite you to schedule a 15-minute call to see how we can be of service. Click here.
Oh, and we would love your feedback on your successes and learnings!