More states jump on the forced retirement bandwagon - Is yours on the list?

Due to the global pandemic, more states are looking at ways to help individuals. A fairly recent change has occurred with retirement funding. Several states have adopted a benevolent grandfather stance on retirement and are legislating that companies must offer some type of retirement savings program regardless of the size of the company.

Recently Colorado joined Oregon, Connecticut, Florida, Illinois, Maryland, and New Jersey in legislating that employers that do not offer retirement plans must automatically enroll employees in an Individual retirement plan (IRA) with a 5% deferral rate.

This means that you start a new job in one of these states you are guaranteed to have 5% of your paycheck deposited into a retirement account, whether it is a company-sponsored 401k, TSP, or an IRA. I know that is not what the legislation says however, companies are risk-averse and all companies will follow the legislation just to be sure they are not sued by a former employee years down the road.

It is now up to the employee to say ‘No’ I don’t want to save for my retirement and the employee must sign a form to say that they do not want to put money into the retirement plan. Should the employee come back later and say you (employer) should have told me the importance of putting money into a retirement plan, the employer can pull out the document the employee signed and say, we did and you declined.

The reality is that the money deposited into the retirement plan is not taxed when put into the plan, the individual is paying less in taxes and thus the 5% deduction from their gross income works out to significantly less than 5% when looking at the net income (take-home pay).

I have found that about a 3% deduction into a retirement plan at work, because of no taxation on the money put into the retirement plan, will lead to no reduction in take-home pay.  This means that maybe a 2% reduction in take-home pay. Of course, this is only relevant to the individuals that decide to start investing in the retirement plan after they already received their first paycheck.

And the retirement savings account is portable. This means you can take your money with you if you change jobs. You can rollover the money into a self-directed account or move it to your new employer's retirement plan.

For those in their 20s and 30s, who feel like retirement is sooooo far away, “I’ll worry about that when I get older”, put the money in the account now. You won’t miss it as it went straight to the retirement plan and was never in your hands in the first place. More importantly, is the concept of the time value of money.

There are plenty of mathematical models that show that someone who is 21 puts $2,000 a year into a retirement plan for 10 years and then stops putting money in the plan, has more money at age 65 than the person who waited until 35 years of age and put in $2,000 per year until they retired at age 65.

And I am not advocating that 20 somethings put money in the retirement plan for 10 years and stop. That is just one illustration of the time value of money. The longer money is deposited and left to grow the more money you have when you need it.

So don’t sign away your golden retirement without getting all the facts. The sooner you start putting money into a retirement plan, the longer the money has to grow and the more money you will have available to use when you decide to retire.

Don’t let fear of the unknown, confusion of your options, or even advice from friends and relatives dissuade you from this common-sense approach to retirement. Though having the government legislate it gives me heartburn, as we live in a country of freedom of choice, this is one piece of legislation that I can get behind as it should help individuals have a better outcome in retirement.

I believe in you!