6: Maximizing Retirement Plans

Retirement plans have funny names like 401(k), 403(b), or 457. These names come from the tax code where they were created. In an April 2, 2001, Dilbert cartoon, Scott Adams depicted the human resources manager asking Dilbert’s boss, “Why aren’t you signed up for the 401(k)?” His response was, “I’d never be able to run that far.”

Although a humorous quip, this response offers several truths. Unfortunately, many people don’t contribute to an employer-sponsored retirement plan. Analysis by Pew Charitable Trusts reports that one-third of business employees aren’t offered a plan. Of those companies offering a retirement plan, the level of employee participation varies greatly by generation. For example, 80% of baby boomers who have access to a plan contribute regularly. They likely see their retirement fast approaching. Although 75% of Gen-Xers participate, the participation rates drop to only 50% for millennials. Like Dilbert’s boss, these people are missing out on a great opportunity to build wealth. Yet, Dilbert’s boss does get one thing right, thinking of a retirement plan in the context of “far” makes sense. As a savvy investor you can build tremendous wealth through these plans, but you do so slowly and steadily. It’s a long-term strategy that works well, especially when you start early. The younger you are when you begin contributing, the easier you can accomplish your financial goals. Thus, half of millennials are choosing to miss out on the incredible advantages that defined contribution plans offer. Finally, the response of Dilbert’s boss suggests that he doesn’t understand how retirement plans work and how to access those fantastic benefits. If you don’t understand the advantages, you definitely need to read this chapter.