Episode 46: How Does A Retirement Plan At A Company Work?

Thank you for joining us for episode 46 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “How does a retirement plan at a company work?”

It can be very confusing. I had a son graduate from college a little while back. He got a job with a big insurance company and had access to a 401(k) with tremendous benefits of matching, and so on. Although, he didn’t quite understand how it worked. Here’s how I explained it. Forget about whether we put money in pretax or after-tax for just a moment. If you don’t know what that means, don’t worry about it. If you do, that’s not what we’re talking about today. We’re just talking about the basics of how a retirement plan works. If you work for a company, you can choose to take some of the money from your paycheck, and instead of putting it in your pocket, after paying taxes on it, you can take that money and put it into a retirement plan.

Company Match for Retirement Accounts

Let’s say I take $100 a week and put it into a retirement plan. Many times, my employer is going to give me additional money. Maybe they’ll give me another $50. So, it costs me $100 to save $150. Not a bad deal. Then, that money gets invested and it grows without me paying any taxes on it. When I get to retirement, I can take the money out. The key is that many times by saving in a retirement plan, the company or the governmental agency that you work for is going to put extra money in for you so it can be a very effective way to save for retirement.

The money is for retirement. If you take it out earlier than retirement, there could be some additional penalties. You don’t have to pay taxes on all that growth, it’s a tremendous deal.

What you want to do is get into the habit of saving at least 10% of your income every paycheck, maybe even 15%. You won’t regret it later. By the way, if you’re getting close to retirement and you have money in a retirement plan, there need to be some strategies to take money out in the most tax-efficient way possible. But a retirement plan, money gets put into it. It grows tax-deferred. Many times, the company you work for puts in extra money. Everybody should be saving for their retirement. If you decide never to retire, at least you’ve got some money put aside.