My First Real Job and They Already Want Me to Retire! Part 1

Filling out all of the paperwork for your first real job can be intimidating, especially when you have to make all of the decisions about your benefits and retirement plan. 
Never Fear! Our Grown Up U podcast is here to take the guess work out by explaining the types of retirement and investments that could be offered plus providing some commonsense advice on saving your money for retirement and for emergencies. Listen as our host, Alison Crane - Family and Consumer Sciences Agent in Garland County interviews her guest, Dr. Laura Hendrix, University of Arkansas Associate Professor - Personal Finance & Consumer Economics and accredited financial counselor, to define financial terminology and take some of the guesswork out of filling out benefits forms. 

Transcript

I just started my first real job and I have a stack of paperwork to sift through. They're asking me how much I want to contribute to my retirement plan. I just started and they are already expecting me to retire. What do I do? I don't know what to tell them. 

Intro: (upbeat music playing) Adulting is easy, said no young adult ever. The Grown Up U: Facts for Success podcast is back in its fourth season to help. Join us for podcasts, providing useful advice for living an independent and satisfying life as a young adult. (Music fades)

Alison Crane: Hello everyone. Welcome to our Grown Up U podcast about new job benefits and some of the basics about beginning to create your secure financial future.

I'm Alison Crane, Family and Consumer Sciences Agent for the Garland County Extension Service. And I am happy to introduce our special guest, Dr. Laura Hendrix, an accredited financial counselor.

Welcome, Dr. Hendrix. Thank you for joining us today.

Dr. Hendrix: Thanks, Alison. It's nice to be here. 

Alison Crane: We are so glad that you can lend us your expertise on a topic that many people find intimidating. I know when I started my first job making all of the financial decisions for my benefits and retirement package was a little nerve wracking. 

Today's episode is part of a two part series that will cover new job benefits and basic investment how to’s. So, let's get started by talking about some of the most basic things a young person needs to know when they are filling out paperwork for a new job.

Dr. Hendrix: It really depends. There will be a variety of different types of new hire paperwork from different organizations, but all employees usually have to complete a W-4, and that's just the federal income tax form that shows how much withholding that you'll have. So, for most single young adults who are just starting out, that would be one.

In addition to that, there may be questions or paperwork related to group benefits like health insurance, maybe there are options for vision or dental insurance. And then, of course, the thing that's one of your main topics for today, designating contributions to an employer provided retirement fund.

Alison Crane: Well, that can be pretty intimidating. And, you know, unless someone has actually taken maybe a class on budgeting or financial management, there might be some terms that they're not familiar with.

So, what are some of the basic terms that someone would need to know about getting started and planning for the finance?

Dr. Hendrix: Okay. So just kind of looking at the big picture and thinking about saving, investing and retirement accounts. One of the things that might come to mind is interest. And interest rates are simply the growth rates or the percentage that's used to calculate how much investment grows over time.

Another term people might hear is IRA, which is simply an individual retirement account.

You might think about risk, and financial risk is the possibility of losing money on an investment or a business venture.

So, we think about risk versus the potential rate of return, and the rate of return is the money made on the investment over time.

You may hear the rule of 72. It's kind of a little general rule of thumb about how long it takes an investment to double, and it's simply, divide the number 72 by the annual rate of return or the estimated rate of return on an investment.

Social Security is something that we think about when we think about retirement savings and investment. So that withholding that we mentioned, that's part of the new way paperwork helps to designate how much money is put aside for those Social Security benefits.

And as we talk about deductions from your paycheck, when you get your first paycheck, not only is that federal withholding taken out for taxes and other benefits, but you may also see automatic deductions for the group health insurance or for your contributions to your retirement account. Maybe there's a special health savings account.

And then for retirement accounts, it might be you may hear the term for 401k or if you work for higher ed like we do. It might be a 403b and those are kind of basically the same thing. That's an employer provided account that employees can make contributions to.

Some people might have a pension and the pension plan is an employee benefit that the employer has committed to make the regular contributions. And then that money is set aside and paid almost like a paycheck to the employee during retirement, usually given as maybe a monthly payment.

And another thing that they may hear from an employer is profit sharing. So, some companies actually give employees an opportunity to purchase stocks or to invest in the company.

Alison Crane: Great. Well, okay, you mentioned automatic deductions. And I think some people might need to know, are there benefits to having the automatic deductions or is it better to just handle all those payments and things yourself?

Dr. Hendrix: Well, one of the things we recommend and that we found out from behavior management strategies is that we're more likely to do those behaviors that are recommended if they're automatic.

I really like anything that we can do automatic in financial management, and we find that it is one of the best ways to save and invest, because if that money is automatically put into an investment account or a savings account, if we don't see it, we're less likely to spend it.

Alison Crane: I understand that that's definitely true because, I mean, you can accidentally spend something just looking at your account. You think, “Oh, I have some money in there,” and then you go out and spend it and then realize, “Wait a second, I needed that for something else.”

Now that we have a little bit idea of some of the terms and things, let's get into some of the basics of this. What are some of the basic benefits? You mentioned some of them, but let's go into a little more detail about those basic benefits that a new employee might be offered. 

Dr. Hendrix: Sure. Many employers provide group health insurance and group health insurance through an employer is usually less expensive than purchasing an individual plan just on the market.

So that's something. And sometimes there are different choices within that group health insurance. Employees really need to kind of be familiar with some of those terms too, and to be able to make those choices.

And in addition to that, there could be a health savings account. Most group health insurance comes with a deductible or an out-of-pocket spending limit. That health savings account allows employees to put money back to pay for those expenses.

And then we talked about the retirement funds. So, there may be an opportunity to put money into a profit sharing or some kind of retirement investment account. That just depends on what that company offers for a retirement fund. If it's a 4O1K or 403B, that we just mentioned, and the employee would then have to decide on what percent of their income they wanted to have automatically deposited into that fund out of their regular paycheck.

Alison Crane: Okay. If this is their first job and they're right out of college, how important is it to actually start a retirement account or contribute to a company retirement plan?

Dr. Hendrix: Well, one thing that we think up for young adults is that there is the opportunity to benefit from the magic of compounding. Time is really on your side. If you have more years until retirement, even small amounts of investment have many years to grow.

Adding the interest to the amount that you saved and then earning interest on the interest really can add up over the years. So that's one of the benefits of saving as much as possible or even just as much as you can afford from the first when you start your first professional job.

Alison Crane: With that, then why should they consider that as a big benefit to them?

Dr. Hendrix: The main point is that there are more years for the money to grow, so the sooner you can start saving, the better. And also, sometimes there is an employer provided match and that's really basically free money.

Alison Crane: Oh, definitely on that. I know our job does that and it is a big benefit and encouragement to save.

Well, when you're going in on this, how can a young person or someone coming into a new job save on taxes by having money deducted from their check?

Dr. Hendrix: You may have heard the term tax deferred. And tax deferred means that the money is taken out of your paycheck before taxes. That can give you a lower adjusted gross income when your taxes are calculated because they'll be calculated on a lower amount of pay. 

So, you usually have a choice whether it's tax deferred or not. The reason we would tax defer and pay taxes on the money later after we take it out when we retire, instead of paying taxes now, as we take it out to put it in the retirement account for most people, they estimate that their income will be lower in their retirement years than in their working years. You would be in a lower tax bracket now and then in a lower tax bracket post-retirement as you're taking it out.

That's the theory on that. For some people, it may not work that way. If people who have a lot of retirement savings and might get tremendous amounts of return on investment in retirement, they could end up in a situation where they actually have more income post-retirement. But for most of us, we have more income pre-retirement, so, it makes sense to tax defer.

Alison Crane: When you're going on this and you're looking at the different funds and things, let's pause for a moment and kind of focus on the difference between a retirement fund and an emergency fund.

Dr. Hendrix: I think it's really important for young adults to realize that difference and to make a priority of having an emergency fund and not sacrificing that in order to save for retirement.

And the reason to have an emergency fund is if you don't, one little crisis can really set you over the edge financially. Most people should plan to have enough in emergency savings so that they could cover if they needed a car repair or if they had a few days or weeks of lost income.

The rule of thumb for that is to have at least enough in your emergency account to cover two months of expenses if you didn't have your income. Now, if you're starting from zero, that sounds like a lot. So, I usually recommend people set a goal of $500.  And then when you reach that, increase your savings to $1,000 and work your way up.

So, you eventually would like a really nice cushion, maybe enough to cover six months or more of expenses. If you're in a double income household, then there's a little bit less risk because it's not as likely that both of you would lose your jobs at the same time, so you might have a little bit more safety net there.

So, it really kind of depends on what your expenses are and the amount of risk you have, how much you have in your emergency savings. And then unlike a retirement investment, the emergency savings needs to be someplace where you can get to it pretty easily. If you think about that, you need a car repair or money to pay just regular bills because of loss of income from some other place, that you need to be able to get to that fairly quickly. A savings account is a great place to keep that.

Now, on the other hand, a retirement investment, you'll want that to be some place where you get a higher return. So, it's not going to be as easily accessible. That would be probably in an investment fund instead of in a savings account.

Alison Crane: Well, I know from my personal experience that having that emergency fund is definitely a benefit. And we do talk about that and basic budgeting, because if you need to know how much you need per month to survive, then you really need to have a basic budget. You can go back; I think it's season one to our podcast and listen to that.

Let's talk a little bit here about why young people today need to save more than their grandparents or their parents did.

Dr. Hendrix: Well, we don't have a crystal ball to see into the financial future, so it's really difficult to guess what might happen to Social Security or different other different types of investments. But we do know it's good to have a variety of types of investments.

One thing that we have seen, though, is that maybe fewer companies are offering pension plans. That puts more responsibility on the individual for planning their own retirement savings. 

And one of the other important things about planning for retirement and using a variety of different types of investment, people may be familiar with this, saying don't put all your eggs in one basket.

If you have all your eggs in one basket and something happens to your basket, they could all be lost. You want a variety of different kinds of investments so that if one thing doesn't work out, you haven't lost everything.

That's why most personal finance experts recommend that we diversify investments or have a variety of investments. And that just means being invested in more than one place.

When we think of retirement, we'll have Social Security, but then you also may have contributions to your employer provided fund. You may also have some stock options to invest in your company. If you have a partner or significant other, that person may also have investment opportunities. 

If you're self-employed, you may have opened your own investment accounts, you may have an I.R.A., an individual retirement account, and then beyond that, you may have other individual investments with some kind of an investment fund or with advice from a financial planner or just your own individual investment strategies.

Lots of options and lots of ways to plan and save for retirement.

Alison Crane: Well, Dr. Hendrix, thank you so much. You've really, I think, helped explain some of the details that a young person starting out in a new job gets bombarded with. And I'm really excited because this is a really important topic right now.

I know a lot of people are very much aware of the interest rates and the current market options.

Next week we're actually going to do part two for this podcast series and we're going to talk about investing beyond the basics of work, retirement benefits, things like that. 

You're going to get some more information next week. Hopefully this will be something that will benefit you in your future plans.

And also, again, set a priority, start saving now. Anybody can do that.

And one of the nice things you can do is in every county in Arkansas, there's an extension agent for family and consumer sciences that would be more than happy to answer any questions you have.

You can look up your local extension office and call them for programs and information there in your county.

Podcast Closer: 

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