It’s easy these days to write off the idea of contributing to retirement savings accounts like 401(k)s. You’ve heard scary stories of people losing half their life savings in the chaos of the market. Plus, you don’t feel like you have any money to squirrel away for the year 2040. You’re off the hook, right? Wrong.
401(k)s are the best savings opportunity you can possibly have—in this or any economy. Here’s why:
YOU GET FREE MONEY.
According to a 2009 survey by Hewitt Associates, 95% of 401(k) plans include an employer contribution. This means many companies will put 50 cents in your account for every dollar you put in. That’s a 50% return on your money—a rate you can’t get anywhere else. Just think: If you contribute $2,000 for the year, your boss will add $1,000. It seems too good to be true, but it’s not.
IT’S A LEGAL FORM OF TAX EVASION.
Until you withdraw the money decades from now, you don’t have to pay tax on your 401(k) contributions—they’re pretax. That has two beautiful effects: First, 100% of your contribution goes straight to your account. That’s more money that gets invested in the stock market, which means more money earned, which means MORE money invested, and so on. Second, funneling pretax dollars into a 401(k) reduces your taxable income. So, let’s say you make $50,000 a year, but you put $2,000 into your 401(k). That means you only pay tax on an income of $48,000, which will save you $500 a year if you’re in the 25% tax bracket.
THE EARLY BIRD GETS TWO WORMS.
You can only contribute a limited amount of money to your 401(k) each year, so if you don’t open one now, you won’t be able to make up for lost time. Say you’re 25, and you sign up for your 401(k) today. If you invest just $2,000 a year (about $38/week), you could have about $603,000 after 40 years, assuming an 8% return. If you were to wait 10 years to start investing the same amount, you’d only have $265,000 waiting when you retire. Tweet that!
So, make it your mission this week to sign up for a 401(k). And if your company doesn’t offer it, tune in tomorrow—I’ll be blogging about an alternate retirement plan.
Do you have a 401(k)? What holds you back from starting one?