As people grow through life, change is inevitable. And as we move through life’s stages we face change. Transitioning through these life stages can be challenging to manage, but can also bring great opportunities for growth when you make good choices. Focusing on things you can control during the changing stages of life is important. And one of the most important things you can control and maintain through life transitions is your retirement savings.
So how should we go about addressing retirement security through life transitions?
First and foremost we need to understand that life is not lived in a straight path. Retirement security is a journey that must adapt to the changing needs of each law professional through each of life’s stages. The various life stages include early working career, accumulation, pre-retirement, at retirement and in retirement.
Managing retirement savings through life transitions
Let’s discuss the transitions in between and during life’s stages that all of us must pass through. During these transitions, we may be landing our first job, changing jobs, starting our own firm, looking at diversifying our portfolio to plan better for retirement, or find ourselves making the leap into retirement. It is important to understand that throughout these transitions, we must keep a focus on our retirement savings.
There are a few different options for managing our retirement savings throughout life’s transitional periods:
- Leave your money behind in a former employer’s plan: Your money stays put where it is as long as you have over $5,000 in your plan. No paperwork is involved at this point, your money will stay tax-deferred and you can stay invested in the plan’s investment options.
- Roll your money over into your new employer’s plan: If you’ve moved to a new job and are eligible for the new employer sponsored retirement plan, you may be able to roll your old account into the new one. This option reduces the number of accounts you need to track and manage.
- Roll your money into an IRA: Roll the money you currently have in your employer plan into what’s called a “rollover IRA.” With this option your account will continue to grow tax-deferred and you can continue making contributions, up to IRS limits, each year.
- Take a lump-sum distribution: Taking your money out of your employer plan as a lump sum payment is an option, but it’s important to understand that you won’t get all of the money in your account because of tax withholding and possible early withdrawal penalties if you are under age 59½.
Guiding principles for saving regardless of life stage
Now that we’ve outlined the different life stages, and discussed the various pros and cons to the different methods of moving your money around during transitions, we will leave you with some guiding principles we like to follow when it comes to saving for retirement. Follow these simple steps and you will be on your way to a more secure retirement.
- Reframe your brain: Don’t think of saving in your retirement plan as a luxury or something you can start later. Consider it a requirement of moving into the legal profession.
- Find your balance: Paying off debt is likely your priority. Fine. But that doesn’t mean you can’t find a balance with saving as well. Much of the success you’ll have as a saver is behavioral. You just have to do it. Find a way to start early, even if it’s a small amount.
- Use your autopilot: If your retirement plan offers an automatic escalation feature, use it! Before you know it, you’ll be saving more than you thought possible.
- Find your match: If your employer offers a contribution match, try to maximize it. Don’t leave valuable money on the table.
- Give your savings a raise: Commit to allocating some percentage of your pay increases – should you be so lucky! – to your retirement savings. Say you’re getting $200 more per pay check – commit $50 of it to your retirement account.
- Don’t give up: Some unexpected thing is going to happen … it always does. It’s okay to reduce what you’ve committed to saving for retirement, but never stop. If you stop, inertia sets in and it becomes very difficult to start again.
Program Operations Director
ABA Retirement Funds