Member Q&A: Should I contribute to my employer's retirement account if they don't offer a match?
My honest thoughts on this plus an alternative!
Today, we're answering a question that was asked during our most recent members call.
Our member wanted to know my opinion on whether it's worth contributing to a work retirement plan when there's no employer match. She also mentioned her employer allocates contributions to Target Date Funds.
I offered a brief response during the call, but I wanted to elaborate further on this, so here we are!
Here is my complete response:
If your employer offers you a 401(k), 403(b), or similar retirement plan but doesn't provide a match on your contributions, there are benefits to contributing regardless.
One of the benefits is that you will be saving and investing money for retirement automatically every time you get paid without having to think about it and no further action on your part other than the initial setup.
Many people postpone saving and investing for retirement because they are looking for the "perfect account type" or waiting for the "perfect time to start the process" without realizing that the clock is ticking and time is passing by.
Next thing you know, decades have gone by, and you have nothing in your retirement accounts.
Taking advantage of the "set it and let it be" process that an employer provides can be highly beneficial because it removes hesitation, guesswork, and 'paralysis analysis' from the process.
Simultaneously, you can also start educating yourself and learning about your other options at your own pace.
I definitely highly recommend having a self-managed investment account that is separate from your employer's account. However, there is a time and place for that, and you have to start somewhere!
In fact, my first introduction to the stock market, before I started investing on my own, was my first 401(k) at the age of 21. Opening and funding that account was one of the best financial decisions I've made in my life.
Our member also mentioned Target Date Funds (TDF), which is a type of fund that invests your money based on the year you plan to retire.
For example, if your retirement date is 2070, the TDF will be more aggressive during your younger years and gradually become more conservative as you approach retirement, with no action required on your part. It does all the work for you!
I am a fan of Target-Date Funds, especially within employer-sponsored retirement accounts.
You might be wondering— what happens if you change jobs?
If you decide to change jobs at some point in the future, you'll be able to transfer the money you've accumulated to the retirement account at your new employer (if they give you the option).
Another alternative would be to roll over the money to a Traditional IRA, where you can continue managing it for retirement.
You can also just leave the money where it is if you’re satisfied with how it’s being invested and they’re not “kicking you out” or charging you additional fees.
The money is yours, and you can do whatever you want with it.
What I would not recommend is cashing it out before you reach retirement age, as that would result in paying unnecessary taxes and penalties and potentially losing thousands of dollars (depending on the amount you have accumulated). Think of it as flushing money down the toilet.
Still not a fan of what your employer is offering? Here’s an alternative:
If contributing to the retirement account at your employer without a match doesn't sit well with you, another option can be to open something like a Roth IRA on your own (if you're within the income limits) and start your own retirement account on the side.
If you don’t qualify for a Roth, there are alternatives (if you’re interested in more details on that, please comment below).
If you choose this option, I highly recommend you make the process as automatic as possible so that it actually gets done.
Some online brokers allow you to set up automatic cash transfers from your bank account to the investment account at specific intervals and will even go as far as automatically investing the money for you in certain funds. I believe Fidelity and Schwab allow access to this type of automation.
Making this process as seamless as possible will make your life a thousand times easier.
It will also guarantee that you're actually setting money aside for retirement and not letting time pass you by.
And that's all for today's edition! Please let me know if my answer offered clarity on this very important question.
Comment below if you have any specific questions you'd like me to address.
Cheers to health and profits!
Mabel
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