Should I Invest in My Company Sponsored 401k?

So we all want to retire some day right? But how do we get to the point where we can afford to retire? There are several options out there for you to take advantage of in order to prepare for your life after work.

Of course you want to start out with your company 401k. The majority of employers will offer this to you after 60-90 days of employment. Some people feel that they cannot afford to put money into a 401k. I say that you cannot afford not to. A 401k is an employee sponsored retirement plan. A 401k allows you to save for retirement while deferring income taxes on the saved money and earnings until you withdraw the funds. Most of the time there is also a company match, somewhere between 50% and 100%. For example the company that I work for matches me 50% up to 4 percent. This means that for every $1 that I contribute to my 401k the company contributes $.50. Where are you ever going to get a return like that? Plus since the money is not taxed this means that you will be placed in a lower tax bracket.

What does that mean? Let me break it down into dollars for you. Let's say you make $50k per year, and you decide to contribute the 4% that your employer matches 100%. This means that you are placing $2,000 into your 401k, but your income is only reduced by $1135. This is a win win situation. You save for retirement, and you are lowering your tax burden. If you happen to make more than the $50,000 example that I gave you, then that is great! You can contribute up to 15% of your income, not to exceed $9,000 per year. So if your employer matches up to a higher percentage go for it. You are only helping yourself in the long run.

The next thing that I am going to tell you is important. Never invest more that your company matches. In doing so you might as well be placing money into a savings account. Your best bet will be to open an IRA; this will allow you to save an additional $5,000 towards your retirement. But that is another article.

Back to the 401k, ok so you placed $2000 into your retirement account. This means that your employer placed $2,000 into your retirement account. This means that you have successfully saved $4000.

What does this mean over the long run? Let's say you start saving towards retirement at age 25. And maybe you decide just to save the 4%, and you don't open an IRA. With just a 7% return on your money, which by the way is much lower that the 10% that the stock market has consistently returned, by the time that you retire you will have $439,990. That is a huge amount of money! And if the market does continue to achieve a 10% gain as is expected this will leave you with $1,067,502! You need to sign up for your companies 401k. This is your future that you are saving for. If you don't do it who will?

It is time to do something for your self. Go to you HR office, and contribute up to your companies match, and watch your money grow.