Free money? Sounds too good to be true right? Thousands of employees take advantage of their employer’s defined contribution plan such as 401(K)’s. Although, many employees are contributing to plans like 401K they are still losing money. So why are so many people not taking advantage of free money? You’re Losing Money by Not Contributing to your workplace 401(k)
What is a 401K
In short a 401(K) a defined contribution retirement plan, provided to employee’s by their employer. This type of retirement plan takes a percentage of the employee’s pretax paycheck and contributes those funds to the investment type of their choosing.
Taking advantage of your 401K?
Given that taxes are not paid when the money is deposited into the investment account the taxes will be paid at withdrawal by the owner of the 401(K). On the other hand, taxable income is lowered due to the pretax contribution for participating in the 401(K) retirement plan.
Therefore, contributing to the plan allows the participant to save for retirement, reduce their taxable income, and watch compound interest work in their favor. Week after week, month after month, and year over year contributing to a 401(K) will build over time and create a decent income in retirement.
Also, some employers offer a match up to a certain percentage this is a slick deal.
You’re Losing Money by Not Contributing to your workplace 401(k)
You haven’t decided to contribute to your workplace 401(K) plan yet? You are not alone many people neglect to contribute for various reason and some decide to only contribute the minimum percentage not fully recognizing the gains they could be receiving if they contributed more of their paycheck.
For example, if your annual salary is $40,000 and you contribute 1% to the workplace 401(K), and received a 7% return on your money over the next 35 years with an employer match of 4% you will have accumulated $114,728 during that time frame. On the other hand, if your annual salary is $40,000 and you contribute 6% to the workplace 401(K), and received a 7% return on your money over the next 35 years with an employer match of 4% you will have accumulated $573,691 during that time frame.
Also, these totals are based on the speculation that you will not receive any raises over the next 35 years. However, keeping in mind that your income will increase over time you will have more growth than the $573,691 mentioned.
You’re missing out on money
Another manner in which you’re losing money by Not Contributing to your workplace 401(k) is taken advantage of the employers match.
If your employer matches any percentage of your contribution that’s the equivalent of gaining free money for retirement. What better way to hedge your investment then to invest with the percentage of your paycheck, and the money that the company is contributing to your account on your behalf.
This can also be looked at as 100% return on your money using the same numbers from the example above if you contribute 6% of your $40,000 annual income every weekly pay period you would contribute 50 dollars and your employer will contribute 50 dollars to your account it is just that easy.
Your seed and your company’s seed both planted over time will yield a harvest that is greater than the small seed planted during your spring years.
Where do you start?
Talk with your HR representative, and ask for the instructions on how to get signed up. In the majority of cases sign up can be done over the phone or online in a few easy steps. Once you’re signed up decide how much a comfortable percentage to contribute per check is for you.
The more you contribute during your working and high earning years the more you will benefit at retirement. Also, make sure you completely understand what you are contributing to, and do not forget about the investing principals. And free money is not too good to be true when it’s matched in your 401(K).
What’s more appealing a seed of corn or the stalk of corn that seed will produce?
For more information check out the resource below.
bls.gov/401kenroll