One of the most important things you will advise your clients on will be their 401(k) retirement plan. This will determine their stability and quality of life once they decide to retire from the workforce. Starting early, avoiding early withdraw penalties and making smart investment decisions will help retirement be a well-deserved and relaxing time. Here are some specifics on how to make sure your clients have a stable retirement fund in their future.
Make sure that your younger clients know they should start a 401(k) plan when they start their first job. Work with them and their budget to see how much they can afford to put aside each month and whether they want to choose a traditional (pre-tax) or a Roth 401(k). Traditional plans are pre-tax, meaning they won’t have to pay taxes on this money now, but will have to whenever they begin to withdraw their retirement. If they choose a Roth 401(k), they will pay the taxes on the amount now but won’t have to worry about taxes when they are withdrawing their retirement. It is a good practice is to increase their 401(k) contribution over time until they are able to set aside 10 to 15 percent of pay. Don’t forget to take advantage of employer matches as well.
2. Develop an accurate estimate of retirement costs
In order to plan for retirement your clients will need to have a realistic number in their head for how much total they will need to save. Whenever you advise clients on how to calculate the costs of retirement, do not just factor in the necessities, think about things like and other major purchases they may need. You can use AARP’s online calculator to help them with your 401(k) calculations. Do not only do this once at the initial set up of their plan, as cost of living and life plans change reevaluate their total cost of retirement.
3. Set up automatic increases
It may not be within budget to max out their plan now, but make sure your clients know that they will want to increase their contribution over time. You can also set them up with an automatic increase in their deferrals that you would manage on a scale of their choosing. You may even suggest that they coordinate this with annual raises so that the felt effect is minimal. Advise them to follow the 1 percent rule, increasing by 1 percent each year will not affect their budget too much and can make a big difference in their contribution over time.
4. Load it up after 50
Help your clients to know the benefits that they have when it comes to their age. Some clients may not know that after they reach 50 years old they can bump up their tax-deferred contribution amount and start padding their 401(k) asthey get closer to retirement. Its important that as you get closer to retirement age you are getting as much out of your 401(k) plan as possible. If your clients are 50 or older, they can contribute up to $6,500 to their 401(k), as opposed to $5,500.
Interested in learning more about 401(k)s? Register for our webinar, Surgent’s Ins and Outs of Setting Up and Administering Solo 401(k)s for your Clients on October 28!