by Deborah Owens
How many friends and relatives do you know who retire too early with little savings and have to return to work to make ends meet? Are African Americans cutting off their nose to spite their face when it comes to their retirement savings? According to the 2013/2014 African American Financial Experience Study by Prudential who responded to their survey, “8 in 10 are eligible to contribute to an employer retirement plan are doing so. Yet many continue to contribute less than their employer match or take loans from their plan.” This greater propensity to withdraw from employer sponsored retirement plans defeats the benefits of tax deferred savings. For every dollar you take out of your 401K prematurely, up to half can be consumed by penalty and taxes.
Here are some tips to help reach your retirement savings goals and keep your nest full of eggs at retirement.
Retirement Savings Tip #1:
Establish an emergency fund. One of the major reasons for 401k withdrawals is a lack of cash reserves. The car breaks down or a period of unemployment lasts a little longer than expected and your retirement funds are the only other liquid savings available. During such tight times, it is all too tempting to access your retirement funds to avoid racking up debt. Some plans allow you to take out a hardship loan, which you can then repay over a period. However, if you leave your employer the loan has to be repaid immediately or it will be considered a withdrawal. The bottom line is a cash reserve allows you to avoid depleting your retirement savings.
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Retirement Savings Tip #2:
Contribute only up to the employer match. If you don’t have enough in your budget to establish a cash reserve consider contributing up to the employer match so that you take advantage of that free money. Establish a cash reserve of six months of expenses and then increase your contribution to your retirement plan after you have met your threshold.
Retirement Saving Tips #3:
Open a 401k Roth or Roth IRA. One of the reasons that employer sponsored retirement plans have been so popular is because of the tax deduction. If you don’t have an employer-sponsored retirement plan consider opening a Roth IRA. It allows you to get tax deferred savings and the opportunity to withdraw your retirement savings tax-free. Some employers are now offering a 401k Roth as well. In the event you have to make a premature withdrawal you will not be taxed on the amount you contributed because you don’t receive a tax deduction on the contribution. You will still be subject to the 10% withdrawal penalty but the most important feature of this type of retirement plan is the tax-free withdrawal at retirement.
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Here’s a rule of thumb to remember: For every forty thousand dollars in retirement income you will need one million dollars in savings. In order for you to save a million dollars you have to allow time and the power of compounding to do the work. Taking withdrawals out of your retirement plan prematurely is like taking, “two steps forward and two steps back.”
To learn how to nickel and dime your way to retirement, download a free chapter of the anniversary edition of my book, Nickel and Dime Your Way to Wealth and learn how a parking attendant who never made more than $12.00 an hour built a million dollar portfolio.
Deborah Owens is the Wealth Coach. She is the author of three books; most recently critically acclaimed, A Purse of Your Own: An Easy Guide to Financial Security, published by Simon and Schuster. Owens is a 20-year financial services industry veteran and former vice president with Fidelity Investments. She is on a mission to change the lives of one million women one purse at a time through the A Purse of Your Own Campaign. Ms. Owens is a media personality who has been a contributor to CNN, ABC News Now, Shape, Essence Magazine, Ebony, Black Enterprise and is host of Wealthy Radio, which airs on WEAA an NPR affiliate in Baltimore, MD. Visit her website at https://deborahowens.com