Why Maxing Out Your Company Retirement Plan Pays Long-term Benefits

 

Whenever we talk to clients about their financial goals, the topic of having enough income after retirement is always part of the conversation. That said, how much money you contribute to your retirement plan now can make all the difference when that time comes.

 

When feasible, we often recommend that our clients max out their company retirement plan to take full advantage of contributions that are tax-deductible and tax-deferred. Putting away anything less than the maximum could result in giving up a significant tax break.

 

If you are not already maxing out, there are significant reasons for adding more to your retirement account. For one, the power of compounding will be on your side. Compound interest can often appear to work miracles with your money over time. Obviously, the more you have in principal, the faster the interest grows.

 

For example, consider an initial investment of $10,000. On a reasonable annual return of 8%, in 20 years that same $10,000 will be worth more than $46,000. Imagine if you were to continually add to this account, even incrementally, on a systematic basis how much your nest egg will grow. While rates of return are bound to fluctuate, the most important point is that the more you contribute today, the longer your money has to grow and the more you will have at retirement thanks to compounding.

 

Before you decide to max out your plan, you’ll need to know the current limits. The maximum you can contribute to a 401(k) or 403(b) is $18,000 in 2017. It’s $24,000 if you are over 50 thanks to the catch-up contribution limit of $6,000. In addition, SIMPLE IRAs and SIMPLE 401(k)s that may be offered have a maximum deferral of $12,500 in 2017 with a $3,000 catch-up contribution.

 

It may not be easy to just start contributing the maximum deferral amount immediately. If it isn’t possible right away, you can build up by making incremental increases until you reach the maximum. If you are like me and forget everything, taking advantage of the annual automatic percentage increase within your company retirement plan is something to consider. Enrolling in this option will automatically increase your deferral rate by a percent each year until you hit the maximum. Another great time to increase deferrals (if not already maxing out) is when you receive a raise. Getting a 3% raise and increasing your deferral by a percent still leaves you ahead.

 

But don’t forget, if your employer offers a match – this is essentially free money toward building your retirement nest egg – so anything you can do to get the maximum match will be another great benefit.

Back to the tax benefits of maxing out your retirement plan. Pre-tax contributions allow you to defer paying income tax on your savings when you are in your prime earning years – and most likely in a higher tax bracket. When you withdraw these funds in retirement, you will likely be receiving a lower amount of income and hence have the benefit of a lower tax rate.

 

If you are young, you will have decades before retirement and time appears to be on your side. However, it is in your best interest to contribute as much as you are able to now. Time passes quickly and you’ll be glad you did when the time comes for tapping into those funds.

 

If you are closer to retirement, you are hopefully in a good place with your retirement planning. Should you have any concerns about retiring or want to get a plan together, feel free to reach out and we will get you started.

 

 

Steve Kohler is Managing Director of DBR Advisory Services at D. B. Root & Company, a Pittsburgh-based wealth management firm. If you would like to contact Steve please e-mail him at skohler@dbroot.com or call 412-227-2800. Read bio…

 

 

This material has been provided for informational and educational purposes only and is not suitable for everyone. This material should not be regarded as a complete analysis of the subjects discussed. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. All expressions of opinion reflect the judgment of the authors as of the date of publication. All information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Share on Facebook
Share on Twitter
Please reload

Subscribe to our monthly Big Picture Financial Planning newsletter

LATEST BLOG POSTS

Please reload

Where to find us:

MID-ATLANTIC REGION

 

436 Seventh Avenue, Suite 2800

Pittsburgh, PA 15219-1818

-

Phone: 412.227.2800

Toll Free: 888.227.0913

Fax: 412.227.2805

GREAT LAKES REGION

 

811 Madison Ave, 7th Floor

Toledo, OH 43604

-

Phone: 419.574.9399

Toll Free: 888.227.0913

Fax: 419.574.9356

  • White LinkedIn Icon
  • White Facebook Icon
  • White Twitter Icon
  • YouTube - White Circle

© 2019 DBR & CO

This communication is strictly intended for individuals residing in the states of AK, AL, AR, AZ, CA, CO, CT, DC, DE, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, NY, OH, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV, WY.

Important Consumer Disclosure: D.B. Root & Company, LLC (“DBR & CO”) is an SEC registered investment adviser located in Pittsburgh, Pennsylvania. DBR & CO and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC-registered investment advisors by those states in which D.B. Root & Company maintains clients. DBR & CO may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. DBR & CO’s web site is limited to the dissemination of general information regarding its investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of DBR & CO’s web site on the Internet should not be construed by any consumer and/or prospective client as DBR & CO’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Furthermore, the information resulting from the use of tools or other information on this Internet site should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from DBR & CO. Any subsequent, direct communication by DBR & CO with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of DBR & CO, please contact the United States Securities and Exchange Commission on their web site at www.adviserinfo.sec.gov. A copy of DBR & CO’s current written disclosure statement discussing DBR & CO’s business operations, services, and fees is available from DBR & CO upon written request. DBR & CO does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to DBR & CO’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.

Advisory HQ’s Top Ten advisors’ rankings are based on methodologies used by established financial news organizations and are highly focused on three pillars: total assets under management (AUM), firm size/quality, and the amount of revenue generated by an advisory firm. AdvisoryHQ’s Advisor Selection Methodology is based on a wide range of filters including fiduciary duty, independence, transparency, level of customized service, history of innovation, fee structure, quality of services provided, team excellence, and wealth of experience. The review and ranking articles are always 100% independently researched and written without the ranked Firms knowing they are being reviewed.

Certain supervised persons of DBR & CO, in their individual capacities, as registered representatives of a broker-dealer, may provide securities brokerage services and implement securities transactions under a separate commission based arrangement and may be entitled to a portion of the brokerage commissions paid to the brokerage firm, as well as a share of any ongoing distribution or service (trail) fees from the sale of mutual funds. 

https:/brokercheck.finra.org/firm/summary/35747

A number of DBR & CO’s Supervised Persons are also licensed insurance agents and may offer certain insurance products on a fully-disclosed commissionable basis.  A conflict of interest exists to the extent that DBR & CO recommends the purchase of insurance products where its Supervised Persons may be entitled to insurance commissions or other additional compensation.