The basics of a 401(k), and the power of time.
Updated: Jan 18
Saving for retirement is a topic widely discussed but many wait until it’s too late to begin saving. The concept is easy, simply put money into your 401k or investment account, find the suitable types of investments for your, and let it grow. However, the human mind can be our own worst enemy, preferring the gratification now rather than when we’re 65 years old and ready to enjoy life. This article will go into detail how you can master your retirement savings through your 401k. Utilizing your 401k will likely be your largest wealth-building tool that propels you into another financial level.
You’ve heard it a million times before this and it stand true today, starting your retirement nest egg early is extremely important. One of the main reasons starting early is important is you can allow compounding to work in your favor. This is when you take your earnings and reinvest them, allowing your retirement fund to grow quicker as time goes on.
Let us look at an example of someone who has started saving at 25 versus someone at 45. The assumptions we’ll make are $1000 with an annual growth rate of 8%, adding an additional $1000 each year and compounding the earnings. If you were to invest as stated above, starting at the age of 25, you will reach the age 65 with $259,056. However, should you start at 45 years of age, you will reach 65 with around $45,761 for retirement. This illustrates the importance of investing early and maintaining a healthy level of returns.
One habit to get into that will boost your retirement potential is automatically contributing to your 401k. There are a couple common ways to do so, with the first being a fixed dollar amount, or the second being a fixed percentage. This will vary plan to plan, but effectively achieve the same goal.
Starting an automatic deposit each paycheck will make saving for retirement easier because you never had a chance to enjoy your money in the first place. A perfect example would be your credit card. It’s easy to spend money using plastic because you never feel the physical money leaving your possession. Same is true with saving for retirement, as you never feel the money leaving your possession.
Lastly, you should be contributing to your 401k plan as it utilizes pre-tax dollars. The significance of this is that any amount that you contribute could be deducted from your income therefore reduce your tax burden for the year, and will grow tax deferred until you start withdrawing money in retirement where the money will be taxed as income. Also, your plan provider may offer a Roth option, which uses post tax dollars and your earnings will grow tax free. Find what fits you best and begin using these tax benefits a 401k provides to you.
Utilizing your employers 401k is something you should take full advantage of. Not only will it instill solid saving habits, if your employer has a match program, that is free money that you should never leave on the table. Matching programs give you even more incentive to save and contribute at least the matching maximum. Consult with your human resource department to confirm if your employer offers a match program.
Starting early is something that shouldn’t be underestimated. Time is your largest asset and can really work in your favor. From there, setting up automatic contributions can make the saving process painless by saving money before you have a chance to spend it. Lastly, you can benefit from the tax benefits of utilizing a 401k plan. Each plan is different so review your investment options. Regardless, starting now will pay huge dividends later, allowing you to enjoy the golden years of life.