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Retirement Readiness


One question that I frequently get asked is: “How much should I save for retirement?” This is not an easy question to answer, because it depends on your personal situation. A good rule of thumb is to save ten percent of your income each year for retirement. Let’s say that you are a single man working at Nissan. Nissan has a 401(k) plan with a 3% match of your salary. My first suggestion is to always utilize the company match to its fullest potential. So this man would contribute 3% of his salary each year into this 401(k), and Nissan would match 3%. Right now, 6% total is going in each year. To get to the 10%, he can increase his deferral to 7% or contribute the remaining 4% to an outside retirement account.

Why would you contribute to an outside retirement account? If you have a workplace 401(k), you should research three areas of your plan: investments, fees, and contribution type.

1) Investments: What investment options does the Nissan 401(k) plan offer? I have seen 401(k) plans with excellent investment options and I have seen others with poorer, more limited options. You can use an independent analytical tool such as Morningstar.com to evaluate your options. With outside retirement plans, such as the IRA or Roth IRA, investment options are pretty much limitless.

2) Fees: what expenses are you paying in your 401(k) plan? I have seen companies pay all of the expenses for employees, although, this is rare. More often, the employee is paying the 401(k) plan advisor’s expense and the investment expense. Often times they have NO clue what they are paying! 401(k) plans are required, by law, to disclose annual expenses and make them readily available to participants online. This is called the 408(b)(2). Do yourself a favor and download this form to see what your retirement plan is costing you and compare this to having an outside retirement account.

3) Contribution Type: I am a huge fan of after-tax (aka Roth) contributions. You contribute dollars that have already been taxed. The major benefit here is that the earnings are tax free in retirement after age 59.5, and you don’t owe any taxes in retirement for qualified withdrawals. If your 401(k) has the Roth, consider using this some or all of your contributions, depending on your tax situation. If Nissan does NOT have the Roth 401(k), this may be a good reason to contribute the extra 4% into an outside Roth IRA. If your 401(k) is only pre-tax, the money that you contribute is fully taxable upon withdrawal in retirement and the earnings are taxed as well.

In conclusion, if you need to save additional money above and beyond your 401(k) plan’s match, consider the quality of investments in your plan, the cost of your plan, and finally whether or not it has the option to contribute after-tax. To answer this question more specifically, we need to know when the Nissan employee plans to retire, how much income he needs in retirement, and his longevity. As a CERTIFIED FINANCIAL PLANNER, I run these projections for clients, and we adjust them as life happens and situations change. But the 10% rule is a great rule of thumb.