My last post (https://ourfinancialcoach.com/2012/02/16/women-employment-and-money-101/) has ‘landed’ me in a few long conversations with a number of my friends; after one of these conversations last night, I thought I’d write a few words that can perhaps help people, particularly women, immigrants and people of the Muslim faith (who are concerned about the issue of interest) navigate this complicated path. I have been quite shocked by the number of ‘normal’ people around me who are practically thrashing their valid employment wages by not participating in employer retirement benefits such as 401k plans in the USA.
Here are the frequently expressed concerns (FECs) and my responses:
1. I am still young; I don’t have to think about retirement now.
It is never too early to start putting money aside for retirement. The best time to save for retirement is when we are young and healthy enough to work long hours, the future is quite uncertain.
2. I don’t make enough money yet, and the last company I worked for did not allow me take my 401k with me, I am better off saving what I can on my own.
If you don’t build a savings culture when you earn little, you probably won’t build one if/when you get richer. Savings go against our natural DNA, which is to spend and live well now, therefore it is not a factor of how much we earn but how disciplined we are.
When signing up for your company’s 401k or other retirement benefits, one of the issues to consider is when you will be vested in your contributions and your employer’s match. Most plans have a provision that makes employees immediately vested in their own contributions, which you can easily roll over to your next employer or financial institutions of your choice upon your exit from the company.
As for opting to save on your own, there are two drawbacks here: you will be saving ‘after tax’ dollars unless you buy an IRA, which is exempt from tax. Even when you can buy an IRA, you may still be cheating yourself if your employer matches your contributions. Let us consider the example of Tito who earns $1,000 every month and is in the 20% tax bracket, Tito’s employer will match 50% of employee 401k contributions up to 6%. If Tito participates in his employer’s 401k plan, he will save $60 and his employer will add $30, which is a total savings of $90 per month. If Tito elects to save on his own, 6% of his after tax income will only amount to $48 and there will be no employer match, so he gets an additional $42 per month ($504 per year) on his principal alone by participating in the employer plan.
3. I am a foreigner and I really don’t plan to be living in America when I am 60 years old.
Whether you live in America or not, the money invested in your retirement account is yours as long as you are vested in it. Your vested retirement account balance is just like any other investment or money you have in a bank, the fact that you don’t live in the US does not mean you won’t have access to your money.
4. I am a Muslim and I cannot invest in companies that conflict with my faith and don’t want to earn interest income.
This is a valid concern; however there are ways around this. If your employer’s retirement plan allows you to make your own investment elections, then you may opt to stay away from bonds and invest your money in non interest bearing instruments such as stocks of the companies you like and mutual funds that are compatible with your faith. In fact Amana funds (http://www.amanafunds.com/), which may be available through your employer plan caters to Muslims in particular.
5. The stock market is really bad, why put my money in a market that’s going to crash anyway.
Quite a few friends who know that I lost a significant amount during the stock market crash in 2007-2008 may be surprised that I am advising younger people to still invest in stocks. In spite of the doom and gloom on the news every day, this is still a very solid way to get long term growth. If you don’t have to retire in 5 years or less, then you can grow your money in the stock market. It is volatile, so you should do your research, but don’t be reactive and defensive by running away from such a big opportunity.
So go to your HR officer, get the plan document and read it, do your research and take a deep breath because it’s not that complicated!
Feel free to contact me privately for questions you don’t want to ask openly: https://ourfinancialcoach.com/contact/