Other considerations relative to building a nest egg for retirement
My previous blog post on “How much is enough” dealt with what the nest egg should look like and what ‘the number’ should be when you retire. As I said in that post, it may seem awkward to write about a retirement nest egg during a difficult economic period, but the planning process does not pause during a crisis, and in fact can be a critical time to address any adjustments of your goals for the next phase. Simply isolating the situational variables that influence the desired 'number' that can trigger a comfortable retirement is not enough. How you cultivate that nest egg and use a variety of savings tools will also influence ‘the number’ in a big way.
This begins with an early understanding of how different savings and investment plans are treated and protected, as well as how you can benefit from employer contributions to those. I was lucky to be able to take advantage of very generous employer-backed saving plans over a good portion of my career. Most of those proved to be great wealth builders and many were very tax efficient.
As an example, for most of my career I had the benefit of contributing to a 401(k) savings plan that had an employer-matching component. This meant that for every $1 of my paycheck contributed to the plan, my employer matched a portion of that (usually dollar for dollar up to 3%). So, in this scenario, and assuming I saved $10,000 in the plan over the course of a year, my employer gave me $3,000 – and that was free money! Well, needless to say I signed up for that awesome program every year up to the maximum allowable by law.
I should add that these contributions are all before payroll and withholding taxes are deducted, including the matching component, so the roll-up from earnings was considerably better than after-tax investment savings. My 401(k) plan also offered a very balanced set of options for investing in equity and bond funds, which is a good risk-mitigation strategy. And the 401(k) savings plan is also federally insured. The downside is that there is maximum amount that can be contributed to these plans over the course of a year.
I benefited from other programs during my career that incentivized me to save beyond what was allowed in the company sponsored 401(k) plan. Thankfully I had good financial advice over that time to help me leverage the right tools. One of these tools was a corporate stock purchase program, which can be interesting if you are comfortable that the company is heading in the right direction. Usually this entitles you to purchase shares in the company at a discounted price out of each paycheck, which are then granted at a later date usually at the end of the year (and hopefully the stock price is up at that point).
Deferred income plans can provide an additional bucket for investing after maxing out contributions to the 401(k). These are after-tax contributions from your pay to another investment plan comprising equity and bond funds, but usually not federally insured. But, again, if you are comfortable that the company is headed in the right direction, the risk of an uninsured plan can be low. A financial advisor will help you navigate this risk and also help you structure the post-separation payout timing (tax advice will be necessary as well).
Deferred stock plans that are part of a bonus program can also be very beneficial to wealth building. Generally the stock award is part of a year-end bonus, but with the vesting (or granting) of the stock spread out over three or so years. A program like this is like the gift that keeps on giving! Again, there are tax ramifications for these that need to be planned for.
Finally, there are non-employer backed plans such as IRAs, Roth IRAs, or just simply investing after-tax savings into CDs or bonds. At any income level, there are ways to save in an effective way. The important thing is to make these savings work for you by viewing them as a manageable investment that you can influence, and a financial planner should always be a consideration in understanding the approach.