Retirement Planning – at Your First Job

Get the Match

For many companies, part of the employee benefit package is a qualified retirement plan like a 401(k). With these types of plans, employees can withhold a certain amount from their paycheck every pay period to be saved directly into their retirement account. Oftentimes, companies will also contribute to your account to match a portion of the amount you save. For example, an employer may say that they’ll match your 401(k) contributions up to three percent of your income each year. While saving for retirement may not be top of mind right away, saving enough to at least earn this free boost to your savings should be a priority.

Sometimes, employers offer both traditional 401(k) plans and Roth 401(k) plans. In a traditional retirement plan, amounts you contribute are not subject to tax today. The trade-off here, though, is that your withdrawals are fully taxable in retirement. Roth plans are the opposite: You still pay tax on the contributions you make today, but qualified withdrawals in retirement are completely tax-free. As a young person, it can be advantageous to utilize Roths when they are offered to you – your income is still relatively low, so the tax benefit of a traditional contribution today may not be significant. As your income rises over time and a tax deduction on contributions becomes more valuable, it can make sense to contribute to a pre-tax retirement account.

Watch Your Vesting

The money you contribute to your 401(k) is yours immediately, but the money your employer contributes might take a bit longer to truly become yours – a process known as vesting. Some employers require you to work at their company for a specified period of time, often between three to five years, before you receive full ownership of the match money. Once you’ve reached the tenure needed for the plan’s vesting requirements, the company’s contributions are yours forever.

This is an especially timely topic as 65% of Gen Z employees report they plan to stay at their current job for less than a year.¹ As the stigma around job hopping is becoming less and less prevalent, more employees are switching employers at a higher rate. Before you choose to make a career move, be sure to look over the vesting requirements for your 401(k). Leaving before the required tenure could cause you to walk away with only a portion – or none – of your employer’s contributions.

Consider Opening an IRA

IRAs are additional wealth building tools that can be used either alongside 401(k)s or as an alternative to them. If you make a living off of freelance work or work for an employer who doesn’t offer a retirement plan, an IRA could be a useful solution for you.

IRAs are long-term savings accounts for those with earned income, including from self-employment. They’re similar to 401(k)s, but have lower contribution limits and no employer match. Like 401(k) plans, though, they also come in traditional and Roth options. IRAs allow you to put a certain amount towards retirement each year and invest in an array of assets like stocks, bonds and mutual funds.

If you do choose to save in both an IRA and 401(k) account, remember that funding your 401(k) may result in an employer match – so you’ll likely want to prioritize saving there first. Then, after you get your employer match for the year, you could prioritize funding your IRA or Roth IRA. For specific advice on when and where to invest based on your unique situation, talk with your Baird Financial Advisor.

Invest for the Long Haul

At this point in your life, time is on your side for wealth building – and you have years before you’ll need (or even have access to) the funds you save for retirement. Keeping this in mind, there is wiggle room to be a little aggressive with how you invest it. One strategy is to check out target date funds, which put together a mixture of stock and bond funds that slide into less risky investments the closer you get to a specified age.

In this young stage of life, you likely have a vast number of investment strategy options available to you – and while it may seem overwhelming to try and figure out what’s best, your Baird Financial Advisor is here to take that responsibility off your shoulders. Take advantage of your advisor’s resources and expertise, as they can assess your risk tolerance, long-term goals and more to help determine what investment strategies may be most effective for you.