The Default Settings on Your Retirement Plan and How to Utilize It (Part Three)

Korey Knepper |

Welcome to part three of this three-part series on “The Default Settings on Your Retirement Plan and How to Utilize It”. If you have missed part one and/or two, you can access those links here. In our previous articles we discussed what the default plan is, and how to invest more aggressively to exploit the fact that the default plan has you making around 7% return. Finally, we will discuss a couple of ways to put more money into your retirement plans. This can be a bit of a dry topic because spending and accumulating is much more fun than saving, but there are some real tangible benefits to reading this and possibly implementing one or two of these into your everyday lives.

Taxes: Taxes are a burden on everyone. It can feel like the money you earn has to take a stop at the IRS first, just for you to be left with the scraps. Also, fair warning, please discuss any tax changes with a tax professional before making any major decisions. Now, our paycheck can feel like it gets hammered by all sorts of deductions before it hits our bank account, so how can we use our taxes to save more money? Well, my first question would be if you received a tax refund last year. While this might seem like a nice treat to start the year off with, a tax refund just means that you overpaid on taxes last year, and they are giving you that money back with 0% interest added on. So, if you received a tax return of say $6,000 last year, that means you gave $500 a month extra to the government and received no interest on it. With interest rates at their highest level in decades, it makes sense to put that extra $500 a month into your savings account, where we can earn an extra 4.5%. This is a change that doesn’t take a lot of time or effort, and I offer this service to see how much you are overpaying in taxes for a small fee. There are other factors as well when it comes to our tax bill that can help us save more for retirement. For example, changing where we are saving, and making sure we are using the proper tax qualified accounts for retirement. The best part about these changes is they don’t require a big change in mindset or discipline, just a call to the HR department.

The next way to save more requires some changes of habit. We can start off with the idea of paying your savings/retirement accounts like a bill. This is one that can seem obvious and can seem easier said than done. You may have tried this before with little to no success, due to life getting in the way. This doesn’t mean that it doesn’t work, but you may need to make it a little more extreme than just moving money to your savings account every month. One way to help is to hold your savings account in a separate place than your checking account. For example, if you have a checking account with US Bank, maybe you should use a savings account at Capital One. This will provide some inconvenience, which can make putting the money away more difficult, however, it also makes moving the money back more difficult, which is the whole point. Once we have gotten to the point where our savings account is sufficient, it is time to start putting more towards retirement. Using the amount that you were originally paying your savings account to fund a tax qualified account. We can also use the interest received in the saving account to start investing more.

When we pair our more aggressive interest rate with investing more, we can see our numbers really do amazing things. Let’s look at a side-by-side comparison, one will be the status quo of investing to get the 401(k) match, and investing in their target fund, the other will put an extra 200 a month into their 401(k) and invest more aggressively. This person in the example is 40 years old, has $150,000 saved up, and makes $100,000 a year. The company they work for offers a match on the first 5%. The retirement target amount is around $1,250,000.

Status Quo: $5,000 to 401(k) with a $5,000 match, invests in target fund averaging around 7.8% over 25 years. Total Assets at age 65 = $1,690,800.96

Save More/Invest More aggressively: $7,400 ($200 a month more) to 401(k) with a $5,000 match, invests in the S&P 500 averaging around 10.15%. Total Assets at age 65 = $2,923,878.70

We can see clearly that the status quo meets, and even exceeds the target number of $1,250,000, however, the difference between the two scenarios is over 1.2 million dollars. This would allow this person to probably retire closer to 60, and shave off years of work.

If you would like to see other ways you can shave years of work off your work life, and add them to your retirement years, set up a call using this link, or fill out the information below. I hope you enjoyed reading this series as much as I enjoyed writing it. Thanks for reading!