How you can lose pension status because of deferment
“Procrastinating is like a credit card: it’s a lot of fun until you get the bill.”
Christopher Parker, actor
As human beings, we love to procrastinate; be it a healthy diet plan, gym sessions or even getting our finances in order. Being in the retirement savings industry, I meet several people who have excellent intentions to save for the future, but not just today.
One recent interaction with a college friend motivated me to reveal the impact of procrastination on our financial lives. For a better understanding, we’ll look at two different approaches to retirement savings.
Steve and Bob, both 25 years old, work at a technology firm with annual income of $80,000 each.
A script I: Steve decides to contribute $5,000 a year to his retirement fund and does so for the next 10 years, until age 35. To qualify for eligible distributions, he leaves the money invested until retirement.
At an average annual interest rate of 6%, Steve accumulated approximately $68,000 at the end of 10 years. Over the next 25 years, that money grows at 6% per year with no additional contributions to $291,847.
Scenario 2: Bob begins contributing $5,000 per year to his retirement fund starting at age 35 for the next 10 years, and leaves the money invested until retirement age.
Under the same investment conditions, Bob also accumulated $68,000 at age 45. Over the next 15 years, that money grew at 6% per year, resulting in net retirement savings of $162,965.
Bob lost nearly $129,000 to procrastination!
After reading these two examples, you may understand how Bob has lost the magic of compound interest, but believe it or not, Bob is the reality of our society. When it comes to financial planning, phrases like “I’m too busy,” “I’m late,” “It’s too early,” or “I don’t know how” are quite common.
How to use deferral to build your retirement savings
Our team decided to take a different approach to retirement savings. Let’s see how procrastination can actually help you, with a little extra action of course.
Enroll in your company 401k plan
A small retirement planning action can generate huge results over a long period of time. Start by enrolling in your company’s 401k plan. Many companies have employees sign them during onboarding, but if yours doesn’t, be sure to ask for it. Most companies offer a matching contribution of up to 3% of an employee’s annual income, although their employer matching formulas can vary.
Thanks to procrastination, you are unlikely to pay enough attention to these contributions or even stop them in the future; therefore accumulating a substantial pension fund. When you change jobs, all it takes is a few requests to transfer the plan to your new employer, and the same cycle continues.
Open a checking account with automatic debit
It’s smart to have a checking account with automatic debit. We suggest you have two current accounts for it to work. Open a new checking account with an automatic debit feature and ask your employer to deposit your salary into that account.
Figure out your recurring expenses, along with the margin to spend and the amount you can afford to save. The next time your paycheck credits the account, the auto-debit feature will automatically send that set amount to your secondary checking account, helping you save more.
Everyone knows that procrastination rarely benefits the life of the average Joe, so if it’s going to exist, why not use it to your advantage.
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