Contributing to your deferred compensation can seem difficult to do and isn’t very exciting in the short term, but if you start early, it pays off in retirement. For many of us, as soon as we get our savings built up, we go out and splurge, buying that new car or gun that we’ve had our eyes on. This is something I have been guilty of in the past.

However, there is one easy way available for us to save money without having the temptation of spending it right away. This option is your deferred compensation plan. 

With every year comes new changes to the contribution limits of your deferred compensation plan. Last year, we were able to contribute $22,500. This year, the government has increased the cap to $23,000 a year. If you’re 50 or older, you have a catch-up provision available that enables you to contribute an extra $7,500 a year in addition to the $23,000. 

I know that it takes a lot to max out your deferred compensation accounts, but I want to remind you that your deferred compensation is one of the most important investments when it comes to your retirement behind your pension. 

You don’t have to max this benefit out, but you should have a goal to put something into your deferred compensation, no matter how small the amount is. Every dollar you put into this account will multiply over the years due to compounding interest. The longer you invest, the more interest you’ll earn. For example, if someone invests just $100 a paycheck for 30 years and earns 7% annually on their investments, their deferred compensation account will be worth north of $245,000. 

A good way to increase your contributions without noticing an impact on your paycheck is to increase your contributions whenever you receive a raise. I always planned on keeping half of my raise and contributing the other half to my deferred compensation account. That way, you get a raise and so does your deferred compensation account.

If you do wish to increase your contributions this year, you’ll have to log into your Fidelity Investments account. From there, you’ll have to navigate to the “Change Contribution” link and enter your desired percentage or dollar amount you plan on contributing. 

I get asked from time to time about other investments people are trying to sell them on, and most of the time, they bring up whole-life products that have a cash value aspect to them. The advice I always give is to always max out your deferred compensation account first, then a Roth or traditional IRA, before you start investing in other products. I give this advice because these accounts offer some form of tax advantage to your retirement savings. 

If you are interested in opening an IRA, which stands for “individual retirement account,” here are some of the basics. You can contribute $7,000 a year into an IRA; if you are 50 or older, you can contribute $8,000. The main difference between an IRA and your deferred compensation is when you can withdraw your money. With the deferred compensation plan, you can withdraw your money penalty-free when you separate from the Department. With the IRA, you can withdraw your money penalty-free after the age of 59 1/2, or for certain qualified life events. 

One of the most important things you can do during your career is to save and prepare financially for retirement. If you have any questions about retirement planning, feel free to reach out and keep an eye out for our next retirement planning class.