Money Done Right may be compensated if you make a purchase after clicking on a link.
Choosing a college and planning for retirement might bring about similar emotions — like trepidation — plus some actual symptoms. (Am I right about those stomach flip-flops?) After all, it’s easy to feel the fear of not getting your decision 100 percent right the first time around.
It can be tough to pull the trigger on the type of retirement fund that’s the “best fit” for you. (Are there retirement fund pamphlets all over your kitchen table? Is your laptop left open to articles that read, “Your retirement fund: Which one won’t poison your portfolio?” Rest easy — it’s totally normal.)
Compare your retirement woes to today’s 17-year-old’s impending decision. Every college-bound kid’s got to wade through stacks of various college viewbooks. His Apple Watch bursts with messages like, “Hiya, Joe. This your admission counselor, and we’re going to send you messages about 350 times a month until you visit XYZ University.”
Have you ever thought about how planning for retirement and college are eerily similar? Just think about it! In both cases, you’ll take some of the same steps:
- Research your options
- Get the employer match (find the right financial aid match)
- Plan a visit
- Hope you won’t choose the same one as your best bud
- List the pros and cons
- Make a life-changing decision
- Move in
Here’s what you can do to make sure your retirement is as on-target as your choice for your future alma mater.
Step 1: Research Your Options
Admittedly, researching colleges might be a bit more fun than researching your retirement options (spending a weekend on a college campus versus analyzing asset allocations — I mean, which would you rather do?) As with most things in the 21st century, the college search process and retirement both start with robust online research.
Your investment choices ultimately depend on your wants and needs, and they might also depend on what your employer can offer you. Examine what’s on the table just as you would when you choose the best college for you. Private college or public university? Go halfway across the country or stick close to home? Opt for an excellent biology program or stellar intramural program instead?
There are a few key types of retirement funds you’ll want to know about. In most cases, you’ll start with your employer-sponsored plan.
But what happens if your employer doesn’t offer a retirement plan? You have options, and here are a few of them:
- 401(k): A 401(k) is a retirement plan that’s sponsored by your employer. A 401(k) allows you to save a portion of your paycheck before taxes and put the money into investments of your choice. You pay taxes on your contributions, the employee match, and any growth when you retire.
- Roth 401(k): A Roth 401(k) is also a plan sponsored by your employer. However, there’s a distinct difference compared to a Traditional 401(k). A Roth 401(k) allows you to save a portion of your paycheck after taxes. You don’t pay taxes on your contributions or any growth when you retire.
- 403(b): A 403(b) is a lot like a 401(k), but it’s for employees of public schools and certain tax-exempt organizations. You don’t have to pay any taxes on allowable contributions until you withdraw from your plan in retirement.
- Roth 403(b): A Roth 403(b) is also called a tax-sheltered annuity or TSA plan. Just like a 403(b), a Roth 403(b) is an option if you’re an employee of a non-profit agency, such as a public school or entity that’s a 501(c)(3) organization. The only difference between a 403(b) and a Roth 403(b) is that you save a portion of your paycheck after taxes. You don’t pay taxes on your contributions or any growth when you retire.
- Self-Employed 401(k), also called a Solo 401(k) or an Individual 401(k): Are you a business owner but don’t have any employees except for yourself or a spouse? You may want to look into a Solo 401(k). It’s a lot like a regular 401(k) — you contribute based on your pre-tax earnings, but you can save a lot more with a Solo 401(k) than a regular 401(k).
- Traditional IRA: You contribute pre-tax dollars to a Traditional IRA and your investments grow tax-deferred until retirement. You’ll pay taxes on the money when you take the money out in retirement.
- Simplified Employee Pension (SEP) IRA: Are you a business owner? A SEP IRA might be a good fit. A SEP IRA gives business owners a way to contribute to their employees’ retirement plans as well as your own. You’ll follow the same rules as Traditional IRAs.
- SIMPLE IRA: A Savings Incentive Match PLan for Employees (SIMPLE IRA) offers both employees and employers a way to contribute to a Traditional IRA. Employers who don’t have a retirement plan can use a SIMPLE IRA.
- Roth IRA: You might surmise that a Roth IRA has similar tax treatment to a Roth 401(k) and a Roth 403(b), and you’d be correct. Put simply, contributions and your investment earnings grow tax-free so you don’t pay any tax on your Roth withdrawals once you retire.
Is the list of choices as tough as that first organic chemistry class you’ll take in college? Remember to do your research — and ultimately, you’ll want to start out with the plan your employer offers. Look into everything because your retirement deserves the most attention you can give it.
Also, know that you can invest in more than one retirement plan. For example, you can bolster your savings with a Roth IRA and invest in your company’s 401(k) at the same time.
Step 2: Get the Match
Do absolutely everything you can to get your employer’s match. When an employer matches your 401(k) contributions, it means that your company contributes a particular amount based on how much you contribute to your own retirement. For example, your company might contribute 50 cents for every dollar you contribute, up to 6% of your pay.
Leaving an employer match on the table is just like refusing a college scholarship — it’s absolutely unacceptable on your part. You want to get the best financial aid award you can for all colleges you’re considering, which includes the best scholarships, grants, and any other financial aid a college is willing to give you.
Find out what your company match is, and save at least up to that amount — saving more than that is an even better goal.
Step 3: Plan a Visit
You’ll need to plan a visit. Luckily, visiting your human resources office is a little less formal than visiting a college campus, taking a tour, and meeting with the soccer coach.
Nope, think of it this way — HR is just a hop, skip, and a jump to the basement of your building — you might even be able to fit it in during a busy day. There, you can fill out a few forms that will enable you to sign up for your company’s 401(k) plan, learn more about the company match and more.
And getting your retirement plan rolling can be even easier than that. These days, you can glean all this information without actually having to talk to a living human. But what if you’re unsure about your options? Wouldn’t you rather be able to ask specific questions about your personal situation?
Opt for the personal touch and let your HR office connect you with an investment professional who is affiliated with your company retirement plan.
Step 4: Don’t Pick the Same One As Your Best Bud
Remember allllll the grownups telling you not to follow your best friend, girlfriend, or boyfriend to the same college? Sound advice, right?
Same idea: Never invest for your retirement with a cookie-cutter approach, because no two retirements are exactly alike. For example, you’ll need to save a lot more money if you plan to spend your whole retirement hitting every single foreign country on your bucket list.
Your cube-mate bestie won’t need to save nearly as much as you if she plans to live next door to her grandkids and become their built-in babysitter. It’d be a total mistake to choose the same retirement funds as your cubie, particularly if she’s investing less than you’ll need for your particular retirement goals.
In other words, resist the urge to visit HR together and check all the same boxes on the retirement forms.
Step 5: List the Pros and Cons
No college decision is complete without the “heart test” or the “gut test” — a simple “feeling” that a particular college is perfect for you. So many college decisions are made using that simple barometer. You know you’re on the right track when you say things like, “The professors care about me. The tennis team is welcoming. They didn’t care that I slept with a stuffed bunny rabbit during my overnighter.”
But… what if you can’t decide? What if two colleges are clambering for you and you’ve felt at home on both campuses? You can’t attend two colleges… so you make a pros and cons list.
Similarly, you have to feel good about the investment portfolio you’ve chosen.
Consider your risk when you choose which type of retirement account you want — your age will impact the amount of risk you take on. For example, if you’re younger, you’ll want to invest in a more risk-heavy portfolio with more stocks, but if you’re inching closer to retirement, you might want to invest more heavily in bonds or other conservative investments to reduce your risk.
Check with your plan administrator if you’re not sure which route to tackle.
Step 6: Make a Life-Changing Decision
At this point, you decide whether you’re going to head for a state school or a liberal arts college. This is also the point where you determine how you want to allocate your retirement dollars. You’ll also decide how much to contribute.
In 2019, you can contribute the following amounts:
- 401(k): You can contribute $19,000 to a 401(k) with an additional $6,000 catch-up contribution if you’re 50 or older.
- Roth 401(k): You can contribute $19,000 to a Roth 401(k) with an additional $6,000 catch-up contribution if you’re 50 or older.
- 403(b): You can contribute $19,000 to a 403(b) with an additional $6,000 catch-up contribution if you’re 50 or older.
- Roth 403(b): You can contribute $19,000 to a Roth 403(b) with an additional $6,000 catch-up contribution if you’re 50 or older.
- Solo 401(k): You can contribute $56,000 with an additional $6,000 catch-up contribution if you’re 50 or older.
- SEP IRA: You cannot exceed the lesser of 25% of compensation, or $56,000 in a SEP IRA. There’s no catch-up contribution at age 50.
- SIMPLE IRA: You can contribute up to $13,000 to a SIMPLE IRA with a catch-up contribution of $3,000.
- Traditional IRA: You can contribute up to $6,000 to a Traditional IRA with a catch-up contribution of $7,000 if you’re age 50 or older.
- Roth IRA: You can contribute up to $6,000 to a Traditional IRA with a catch-up contribution if you’re age 50 or older.
Step 7: Move In
What’s left? Yep, move on your decision — just like you’d move into your college on moving day.
And know this: It’s never too early to start thinking about both your college decision or your future retirement.
Give yourself some peace of mind and make a decision early on in your working career. After all, you wouldn’t want to wait till May of your senior year to make a final decision about college (and give your parents a heart attack in the process).
It’s also never too late to start saving for retirement — even if you’re not as young as a prospective college student.
Melissa Brock is the Money editor at Benzinga. She spent 12 years working in the admission office of her alma mater, Central College, and knows a thing or two about helping high school students and their families choose the right “fit.”
Earn. Save. Grow.
Sign up for updates on ways to make, save, and invest money.