Starting a new job can be exciting and full of opportunities. If you have recently started a new career, congratulations and best of luck. However, before you rush off to lunch or happy hour with your new co-workers, you should first work to avoid these common financial mistakes made by new employees.
- Forgetting to rollover your former employer’s workplace retirement plan account. When employees terminate employment, they earn the right to rollover their workplace retirement accounts. In the excitement to start something new, people often forget about retirement accounts with former employers. Why should you care? Employers maintain benefit plans for their current workforce, so many employers will charge additional fees to accounts of former employees for continuing to administer retirement benefits. Such fees are perfectly legal, provided the fee is reasonable and the services necessary. By rolling over your workplace retirement account to an IRA, you can avoid such potential fees, preserve your account’s tax-deferred status, engage investment advisers for personalized advice, and generally access a wider range of investment options.
- Failing to select appropriate withholding allowances. If someone unknown wanted to borrow hundreds or thousands of dollars from you at zero percent interest, would you let them? We didn’t think so. Unfortunately, workers do this when they set their tax withholding allowances too low. If you receive a federal tax refund from the IRS, know that the IRS is simply giving you back your own money, without interest. What can you do? Form W-4 tells your new employer how much money to withhold from your pay for federal income taxes. It is best to give the IRS what you expect to owe in taxes, and not a penny more. There are several online calculators that can help you determine an appropriate federal tax withholding amount.
- Delaying enrollment in your new employer’s workplace retirement plan. Most employers require employees to complete enrollment forms for workplace retirement plans. Why participate? Contributing to workplace retirement plans is convenient, carries meaningful tax benefits, and makes you eligible for potential employer matching contributions. If your employer offers a match and you do not contribute, you get nothing. Before you read any further, or get another cup of coffee, go directly to your human resources department and request a retirement plan enrollment form. Complete it now. If you have not satisfied your plan’s eligibility requirements, ask your employer to keep your completed enrollment form on file until you do.
- Contributing inadequately toward your retirement savings. Participating in a workplace retirement plan is the first step. Contributing adequately, is the single most important thing you can do for yourself. How much should you save? We recommend contributing 15% of compensation, starting from the moment you enter the workforce. As an example, if your employer matches 3%, then you may want to contribute 12% of your pay. If you are mid-career and have not started saving, then you should contribute more. Can’t afford that much? Try contributing as much as possible, and then increase your contribution rate by 1% each year.
- Neglecting your retirement account’s asset allocation. Investments with greater growth opportunities generally carry greater risk of loss. The right asset allocation lessens your risk of loss when financial markets decline, but also provide opportunities for gain when financial markets grow. When choosing an asset allocation, consider your investment time horizon, and personal risk tolerance. There are several free online investment risk profile questionnaires that can help.
By avoiding these financial pitfalls, you can begin your new job with confidence and financial peace of mind. If you need help or have additional questions, we invite you to contact us.