The retirement savings gap is growing at an alarming rate. Many millennials are overwhelmed with student loans, consumer debt, and historically low pay. Unfortunately, this often means that retirement savings gets put on the back burner while other financial goals and dreams take up the spotlight. To combat this, and to help their younger employees prepare for retirement, many companies have started to implement an opt-out workplace retirement plan.
Typically, workplace retirement plans work like this:
You start working with an employer and sign up for their workplace retirement plan. This might be a 401(k), 403(b), or Simple IRA. You can decide how your funds are allocated within your account, and you decide how much you contribute, which usually is a percentage of your pay and is removed from each check. Sometimes they’ll even contribute a matching percentage (up to a predetermined point) to help you fund your retirement account, which is a great deal!
However, an opt-out plan works in a different way. Essentially, you’re automatically enrolled in your company’s retirement plan when you start working there. Usually, your employer makes contributions from your paycheck on your behalf at a predetermined low rate - around 3%. Typically this is the amount that the employer may match (which is essentially “free money”). You may be able to withdraw contributions that were made automatically within 90 days of the contribution being made if you choose to opt out of the plan.
There are some clear upsides to an opt out retirement plan. When your employer prioritizes your retirement savings early on in your career, you’re likely to be able to successfully save more and take advantage of compound interest. However, you may also become stagnant in your retirement planning if you aren’t forced to think about it. Make sure that you’re still contributing enough to meet your retirement goals - both in respect to your retirement timeline and lifestyle. Also, the default investment option chosen by the employer may not be what ultimately makes sense for you. Be proactive once you decide to participate, make sure you are contributing the right amount for you, and to the right investments.
Even if your employer doesn’t have an opt out retirement plan, you can still automate your retirement savings. As soon as you’re eligible to enroll in your employer’s retirement plan, start thinking about your savings strategy. It can even be helpful to speak with a financial planner to determine how much you should save for retirement, and what percentage of your salary you should be saving now to hit those goals.
Do you have retirement savings questions? Contact us today! We’d love to help you navigate setting long-term savings goals and creating an automated strategy to amplify your retirement savings and put yourself on the path to financial success.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.