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Investor’s column: Here are some tips to help grow your retirement portfolio

Millennials ask: What’s it like to retire?

The New York Times asked journalism students around the country to talk to seniors about retirement. This is what they recorded.
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The New York Times asked journalism students around the country to talk to seniors about retirement. This is what they recorded.

Are you missing out on free money? Think about contributing part of your paycheck to a 401(k) to save for retirement and, hopefully, obtain a big tax refund.

Taxes are lower because 401(k) investments grow tax-deferred. Procrastinators, big spenders and undisciplined savers love using automatic investing to remit funds.

For 2019 the contribution for 401(k) limits increases from $18,500 to $19,000. People over 50 now get a bonus or catchup contribution of $6,000 for an impressive $25,000.

Employers often match a percentage of an employee’s 401(k) annual contributions, up to a specified amount. Some firms might match 50 cents for each dollar that’s legally deferred up to 6 percent of pay. Others might partner-up from 4 to 6 percent of an employee’s yearly salary. Many employers, however, choose not to match employee contributions.

So should you give money to a 401(k) without an employer match? I think the short answer is usually yes.

Prioritizing 401(k) and Individual Retirement Account contributions is key to maximizing tax savings. Everyone needs retirement savings — even without a match from your employer — as a financial goal.

If your employer doesn’t match 401(k) contributions, think about donating to an IRA first. This strategy offers greater flexibility to minimize IRS tax bills. Once you’ve contributed the maximum to your traditional IRA, consider maxing out your 401(k) — even without a match by your employer.

Jim G. Germer.jpg
Jim Germer is a CPA and financial adviser at Cetera Financial Specialists in Bradenton.

Young people saddled with student loans probably shouldn’t participate, in my opinion, in a 401(k). Middle age taxpayers, without much consumer debt, are usually more able to participate in 401(k)s and IRAs.

But what if you’re pushing age 50, earn more than $190,000 annually and can’t contribute to an IRA because a pension plan covers you? I’d consider maxing your 401(k) and then invest in a taxable, non-tax-deferred, additional investment or brokerage account.

Now let’s talk about some other common 401(k) mistakes.

Missing out on free money: Suppose you earn $50,000 per year. If your company matches 50 percent of your contributions, up to 5 percent of your salary, you could contribute $2,500 into your 401(k) each year.

So with your $2,500 deferral and $1,250 employer match, you’d flow $3,750 into your account yearly. Expect to grow your retirement savings, over 30 years, to about $354,000 — provided you achieve a seven percent annual return.

A match is a good thing: Contributing only 3 percent of salary, often a typical automatic contribution level, is set by employers. So with an employer match, only $2,250 will go into your retirement account yearly.

Don’t be foolish and miss out on getting the $500 in employer contributions each year — just for funding the 5 percent matching limit.

Forfeited investment growth adds up over time. Let’s say, for example, you earn $50,000 a year, and your employer matches contributions equal to 50 percent, up to 5 percent of your earnings. With possible 7 percent annual returns, and contributing three percent of salary, a 401(k) would only grow to about $212,500.

Understand the $141,500 difference might affect your retirement savings and, clearly, your financial security at retirement.

You may have heard about the debate over the federal estate tax lately. Some Republican lawmakers want it changed or scrapped entirely. Here are three things you need to know about what’s on the books now.

Poor savings rate: It’s natural to worry about paying monthly bills when you try to put more money into your 401(k). Try starting small, and then save enough to ensure receiving your employer’s full match or 5 percent. Now work at increasing the amount you defer from your wages.

Increase your contributions by 1 percent each following year, and, hopefully, watch your 401(k) grow.

Take-home pay probably won’t be affected much by a 1 percent increase in savings, for example. Increasing contributions might lead to saving, perhaps, thousands more for retirement.

For instance, saving $26 in a biweekly paycheck, $750 a year, might yield almost $101,000 in your account in 30 years.

Holding too much company stock: Enron was once the seventh largest company before it went bankrupt on Dec. 2, 2001. It was tough for Enron employees to lose their jobs, but many lost their entire retirement savings because they held vast amounts of Enron stock.

One former manager was caught holding 14,000 shares of Enron that ultimately became worthless. Sure those shares were once worth $1.3 million, but today the former manager still can’t afford to retire.

In good times it’s tempting to load up on company stock, but if your company goes south, you might lose your life savings.

Raiding funds early: Many retirees, now living on fixed incomes, come to regret taking money out of 401(k) plans early. Paying off credit card debt, educational expenses, or starting failed businesses often leads to struggling financially in retirement.

You always want to be able to afford a meal at a restaurant rather than eating government issued cheese at home, or having to work past age 65 because you blew your nest egg.

Compounding effects of money, along with tax deferral accumulations, may increase the balance in a 401(k) as much as ten-fold over a long career.

Deferral amounts: Many of us opt for initial salary default deferrals of about 3 percent and never bother to change our contribution rate when our finances improve. Failing to adjust deferrals higher, for example, 12 percent, often leads to underperforming investments and paying too much income tax.

Here are some other 401(k) tips:

Watch fees because this reduces the amount invested, and always consider the compounding effect of money.

Make sure your employer match contributions are vested. New jobs require several years before you are allowed to keep an employer match. You get to keep your contributions, in any case. Negotiate with your new employer for amounts left on the table, foregone.

Remember you can roll old 401(k) plans into new 401(k) plans or traditional IRAs. Rollover may allow better or additional investment options. Consult a tax advisor to determine if this is prudent.

Jim Germer is a CPA and financial adviser at Cetera Financial Specialists, LLC, member FINRA/SIPC, located at 100 Third Ave. W., Suite 130, in Bradenton. Call 941-746-5600 or email