Category Archives: Retirement

What Does “Employer 401(k) Match” Even Mean?

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First of all, congratulations! If you’ve just started a new job that offers a 401(k)-matching program, you’ve taken a big step on your journey to building wealth and likely a move in the right direction for your career too! You’re probably pretty keen on how your new job helps your career but the 401(k) aspects may seem a bit more hazy – not to worry! We’ll cover what this means and why it is important to your financial future.

A 401(k) is an investment vehicle with meant to help employees save for retirement (and it’s tax-deferred, so the more you contribute, the less you’ll pay in taxes this year – instead you’ll pay taxes when you withdraw the money in retirement). As employers and the economy at large shift away from pension plans, 401(k)s have exponentially grown in popularity. While there may be a few disadvantages (keep in mind, there are disadvantages to everything if you look hard enough), 401(k)s are widely accepted as a win for the individual controlling their own 40retirement fate.

Put simply, you yourself can elect to have your employer automatically deduct a percentage of your pay checks and invest in the 401(k). For instance, you might tell your employer to put 10% of your gross income from each and every one of your paychecks into the 401(k) plan.

Pay Close Attention To Matches Offered

As an investment into their employees’ futures and as a part of their total benefit package, many companies will match a percentage of an individual’s contribution to their 401(k) plan. Here’s an example:
Penny works for 321 Ventures and earns a $50,000 salary each year. She chooses to contribute 10% of her pre-tax income to the 401(k) plan.

Her employer’s rules state that they will match 50% of her contributions with a maximum employer contribution of $4,000 per year. This is the employer’s safety net. Because they don’t want to spend too much, the place a cap on matches. Most employers do this.

In Penny’s example, she will contribute $5,000 of her own money. Her employer will contribute 50% of her contribution, so $2,500. At the end of the year, her 401(k) balance will be $7,500 (pending gains or losses from the investments within her portfolio).

Let’s look at Marshall now, who has the same position as Penny at 321 Ventures and earns the same $50,000 salary. However, Marshall instead contributes 20% of his income to the 401(k) plan. Way to go Marshall!
Marshall’s investment will be $10,000 of his money plus the maximum employer match of $4,000. Marshall saved $14,000 this year to his plan! Because 50% of Marshall’s investment is over the $4,000 employer cap, the employer match will be the $4,000.

Every Employer Sets Its Own Rules

Please note that each employer sets their own thresholds. The example above of 50% with a $5,000 cap is a common set-up, though your employer may have different rules. Consult your company’s HR department or carefully read your employment contract if you are unsure of the employer match being offered for your job.

401(k) employer matches are so great because it is basically free money. It is a benefit that is technically a factor in your total employment package, but nonetheless it is money that you otherwise wouldn’t have. If it is possible for your personal financial situation, the best decision is always to contribute enough to at least get the employer cap. Otherwise, it is money left on the table.

The Ideal Amount of Savings at Age 30

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The Ideal Amount of Savings at Age 30I love looking really far down the road. I love projecting account balances in the future, and I love the idea of compounding interest.

I also like making money today, I like having the ability to spend money on the things I want, and I have no problem paying a little extra for things if I can afford it. I hate stress, so if a few dollars saves me from worrying, it’s money well spent.

So I thought about, in order to retire comfortably at age 66, I’d need $4 million. Why that much? Because it’s such a huge number, that even with inflation and everything, there’s no way I could ever need more than that. It’s very possible I won’t need that much. But I know that in 40 years, if I have $4 million in savings, there’s no way I won’t have enough money for everything I’ll want.

So working backwards, with an 8% rate of return, I’d need $250,000 in savings by age 30 to hit that mark. If I earn 8% every year, I’d have $367,000 at age 35, $539,000 at age 40, $1.16 million at age 50, $2.5 million at age 60, and just about $4 million at age 66. The “normal” retirement age will probably increase in the next 40 years, so I’ll still be retiring early at age 66.

$250,000 is not an easy target to hit by 30, but the benefits are enormous.

There would be no need to save a dime the rest of your life. Once retirement is fully funded, there’s no need to save extra. As long as you earn as much as you spend, you can spend that money however you want. No more saving 20% for retirement, you can focus on education, the house, travel, or whatever else you’d like.

Instead of saving for huge goals, savings can go toward family vacations, education, and some of life’s pleasures. $250,000 is my goal for 30, and then that extra 20% (or more ideally, 60%) of income that goes to savings can go toward a house or kids.

Readers, what do you think? Is $250,000 a realistic goal? Are the benefits enormous enough to make it worth it?

6 Ways to Make an Early, Penalty-Free Withdrawal From Your Retirement Fund

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After years of contributions to your retirement fund, you may need to withdraw money to pay for an expense. Typically, withdrawals made from retirement accounts, e.g. a 401(k) or IRA, made before age 59 ½ are subject to a 10% early withdrawal penalty. There are some instances that you can take money from your retirement fund without having to pay the penalty. You may, however, still be subject to income taxes on the amount you withdrew.

Use it for Medical Expenses

You can withdraw from your retirement fund to pay for medical expenses that aren’t covered or reimbursed by your health insurance company. The total amount of the expense must not exceed 10% of your adjusted gross income and withdrawal must be made in the same year the medical expense occurred.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Pay Health Insurance Premiums After a Job Loss

You can make a penalty-free withdrawal from your IRA to pay health insurance premiums for yourself, your spouse, or dependent children if you lose your job and collect unemployment for 12 consecutive weeks. Unfortunately, this penalty-free withdrawal doesn’t apply to 401(k) plans.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use It for Higher Education Expenses

You’re allowed to use retirement funds to pay for college-related expenses including tuition, fees, and room and board for yourself, your spouse, your children, or grandchildren. (Room and board only qualify for students who are enrolled at least half-time.) The early withdrawal must be used to pay for education expenses at a qualified institution to avoid the penalty.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use it Towards Your First Home Purchase

You can withdraw up to $10,000 ($20,000 for couples) to use toward the purchase of your first home. The home purchase doesn’t have to technically be your “first” home purchase. The IRS only requires that you haven’t owned a home that served as your primary residence within the previous two years.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Cover Expenses After a Disability

The IRS allows you to withdraw from your retirement fund without paying a penalty if you’ve suffered “total and permanent disability.” You’ll have to provide documentation you’re your physician or insurance company to show you qualify.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Withdraw Any Excess You Paid

The law only allows you to contribute a certain amount to your retirement plan each year. If you mistakenly contribute too much, you can withdraw the excess without penalty. You have until the tax-filing deadline, usually April 15, to withdraw excess contributions from your retirement fund. Otherwise, you face tax penalties.

This exception applies to: Qualified plans like a 401(k)

401(k) Loan as an Alternative

If you need to make an early retirement account withdrawal that doesn’t meet any of the requirements to make a penalty-free withdrawal, you can take a loan against your 401(k) if your employer offers it. A few caveats: you must repay the loan within five years, you miss the opportunity to earn compound interest, and the full balance of the loan may be due if you leave your job before the loan is completely repaid.

Tax Implications

Make sure you consult with a tax professional to completely understand the tax implications of withdrawing from your retirement fund. Keep all your documents and receipts related to withdrawal and usage of the funds in case you need them for your tax return.