Retirement planning may not be high on your priority list as you try to learn the ropes of your new job, but putting it off could cost you thousands of dollars in the long run. And it’s especially dangerous for those who tapped their retirement savings during the pandemic and are now behind where they expected to be.
Take a few minutes some evening or on the weekend to do the following three things so you can get the most out of your retirement accounts in 2021.
1. Decide what to do with your old retirement account
If you had a retirement account at your previous job, you must decide what you’re going to do with it moving forward. You could leave it where it is, but this usually isn’t the best move. It can be more difficult to keep track of what you have when it’s spread out over multiple accounts. Also, you could end up paying higher fees than you did previously, because some employers who pay their employees’ 401(k) fees stop doing so after you leave the company.
If you like your new company’s retirement account, consider rolling over the funds from your old plan to your new one. But check with your employer first to make sure this is allowed. Not all companies permit you to roll over funds from another retirement plan, and doing so may incur a one-time fee. You also have to make sure your old and new retirement savings are taxed the same. If you had Roth savings in your old retirement account, but your new 401(k) is tax-deferred, rolling your old funds over may not be an option.
You can always open an IRA on your own and put your old retirement savings there if you prefer. This is generally the most popular strategy, because you can choose any broker and invest the money in just about anything you’d like. This gives you a lot more control over what you’re paying in fees, though your old retirement plan administrator may still charge you a one-time rollover fee.
2. Decide how much of each paycheck you’d like to defer for retirement
Assuming your new retirement plan enables you to sign up right away, you must decide how much of each paycheck you’d like to defer. You may be able to choose between deferring a dollar amount or a percentage of each paycheck.
You probably have a rough idea of how much you should defer if you’re making about the same amount at your new job as you were at your old one. But if your new job pays more, you may be able to set aside the same amount you’re used to every month by deferring a smaller percentage of your income. Or you could choose to proceed with the same percentage as before and just save more every month.
Take some time to calculate how much you need for retirement if you’re unsure how much you should be saving each month. You should also do this if you’ve had to tap your retirement savings recently, as you’ll have to save more going forward every month to make up for your early withdrawals. Be sure to reevaluate how much you’re saving every time you get a raise or your financial circumstances change.
3. Learn how your new company’s 401(k) match works
A 401(k) match is free money you can put toward your future, but you need to understand how yours works to get the most out of it. Some offer dollar-for-dollar matching where, for example, you get $1 from your employer for every $1 you contribute up to a certain percentage of your income, while others may offer a $0.50-on-the-dollar match, where you get $1 for every $2 you contribute. Knowing how your match formula works is crucial to getting all the money that’s available to you.
You should also familiarize yourself with your company’s vesting schedule, particularly if you think you may not stay with the company for very long. The vesting schedule determines when you’re allowed to keep your 401(k) match if you leave the company. Though some employers let you keep that money right away, it’s more common for employers to gradually release these funds to you over time or to require you to work for the company for a certain number of years before you can keep any of your match at all. Leaving before you’re fully vested could cost you, so if you think that’s a possibility, you may want to save more on your own or try to stick it out at your new job a little longer.
If you have any other questions about your new retirement plan, ask your company’s HR department or your plan administrator rather than making assumptions. This is the money you’ll depend on in your senior years, so it’s worth going out of your way to ensure you’re making the best decisions possible.
