Published in the April 13-26, 2016 issue of Morgan Hill Life
By Brenda Friederich
Brenda Friederich
The team at RNP recently met with a Morgan Hill dental office looking to provide a retirement plan for their business. The dentist saw this as a valuable employee benefit that would also benefit him as a business owner.
One of his initial concerns was having a quality investment offering at an affordable cost. Secondly, he was already busy running the business and did not want to take on more day-to-day work or responsibility to implement or maintain the retirement plan. Lastly, he wanted to work with a fiduciary advisor who could help design a retirement plan that meets their needs and provide ongoing advice and education for the plan and employees.
After spending time with the owner and learning more about his business, we worked together through various options to determine a solution that addressed his concerns and fulfilled his requirements.
The result for this small business was a new 401(k) plan that employees can now save up to $24,000 each year for retirement and reduce their taxable income. For those years of extra profit or when more tax deductions are desired, the owner can save even more using the profit sharing option that he included in his plan while strengthening employee retention; thus a true win-win for both the owner and the employees.
As an employee, what can you do to benefit most from your 401(k)?
First and foremost, contribute early and regularly. Capture any employer contribution or match which can often double your savings rate. Keep contributing through market ups and downs. The more time you are invested compounds the amount of savings you end up with.
For example, a $100 contribution per bi-weekly pay period can add up to over $104,000 in 20 years assuming a seven percent return.
Sometimes the investment choices within a 401k plan can seem overwhelming.
The three main questions you should be asking yourself are:
1) How many years will I be working until I can retire?
2) How diversified are my investments? and,
3) What are the fees involved and how will they affect my retirement earnings?
If you feel you don’t have large sums of money left to save, start by saving a little bit each paycheck.
The automatic convenience of payroll deduction combined with immediate tax savings can minimize the effect on take home pay. You will quickly adjust knowing your future self will be comfortable.
As an employer, what can you do to benefit most from offering a 401(k)? Like the local dentist, offering a retirement plan as part of your benefit package can help you attract and retain good workers and reduce costs of employee turnover.
Recent research from Glassdoor.com found that 57 percent of employees said benefits and perks are among their top considerations before accepting a job. And four in five workers say they would prefer new benefits over a pay raise. A 401k is in the top five employee elected benefits.
A company sponsored plan is also the most effective way for small business owners to save for their own retirements. Owners can contribute to an IRA, but contributions are limited to $5,500 a year in 2016 ($6,500 if you are age 50+). With a 401(k), owners could save as much as $53,000 annually.
Tax savings add up from up-front deduction for contributions plus deferral of taxes on earnings throughout the life of the account. That means that over 25 years (in a 25 percent tax bracket) after taxes paid on distributions you could have up to 28 percent more to spend during retirement from your retirement account.
In 1980 there were no assets invested nation-wide in 401(k) plan accounts. Compare that to today where $4.7 trillion is in 401(k) participant accounts combined as of Dec. 31, 2015, according to recent statistics released from the Investment Company Institute. Nearly 80 percent of full-time workers have access to a retirement plan, and 90 percent of large company employees participate.
While small businesses have some catching up to do, the 401(k) is now the most popular retirement savings account in America. There’s good reason. 401(k) accounts offer something for everyone.
Whether you are a company owner or employee, make sure to take advantage of the many opportunities a retirement plan has to offer.
If you don’t have a plan in place, give us a call to learn and discover the options that will best benefit you.
Brenda Friederich, CFP® is an Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. She can be reached at 408-779-0699 or [email protected].
