Benefits Of Your 401K
By: Larry Lane for www.InvestorZoo.com
We all know that we have to save for our future retirement. What is the most effective way to accomplish your goal? If you have ten or more years to retirement, I would argue your best investment vehicle is to get involved in your company's 401k or equivalent retirement savings plan. Ideally you'll want to contribute the maximum amount that you are permitted by law. This year, the maximum amount is $15, 500. If you're not involved in your employer's 40lk or savings plan, you're missing out on some really great benefits.
Tax Deductibility
For arguments sake, let's assume you earn $50, 000. You have decided you can budget 10% of your salary toward your 401k or $5000. By contributing $5000, you're actually lowering your taxable income to $45, 000.If you are in the 15% tax bracket; you've just saved $750 by lowering your tax rate. In addition, if you have state income tax, you'll save even more money. In essence, you're going to automatically turn a profit on your investment because you're keeping the government's hands off your money until you turn 59 1/2. There are exceptions to this rule; please talk to your tax advisor or financial advisor. Let your money grow tax free though; you'll be amazed at the power of compound interest. Your investment dollars will grow tax deferred until you withdraw them at retirement time.
Example
Invest $5000 annually for 30 years and earn 8% interest and you'll have $662, 000 at retirement. If you earn just 2% more, that $662, 000 turns into $991, 963; almost one million dollars. Think about it, you've invested $150, 000 in pre tax dollars and if invested correctly, you're a millionaire. Now remember in 30 years, that million dollars will be worth about $500, 000 in today's dollars. This assumes a historical 3% inflation rate. If you can't quite afford $5, 000, how about investing just $100 per month into an account earning 8% return compounded annually? You'll be rewarded with a retirement account of $146, 815 in 30 years. Best of all, your earnings grow tax free. Want to run more retirement simulations go to: http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Keep investing! There will inevitably be wars, hyper inflation, political unrest and possibly a terrorism event during your investing career. You must be patient and consistent. You will have to invest when your portfolio is showing losses quarter after quarter. You will read the headlines such as "The evils of mutual funds" or "Buy and hold is dead". Drown out the noise; keep working and keep investing. Once you make a commitment to start your retirement plan, make a commitment to yourself to always continue your contributions. NEVER touch your money in your retirement plan until the minimum distribution age of 59 1/2. Yes, I know you want to go on a vacation, buy a big screen TV or perhaps a new car. Too bad, tough it out! Get a 2nd job, cut back on other expenses, but do not touch your retirement account. If you ever get sued and are found responsible in a civil suit, the winning party cannot touch your retirement account. It is protected by law. This is how important the government views your retirement account.
More 401k benefits
Most companies will match a percentage of your contribution and give you free money! This match may be 1-4% of your salary. Getting back to our original wage earner who's making $50, 000; he/she is going to receive an additional $400-$1600 through the employer match of their 401k. This can be viewed as a raise.
Not all employer retirement 401k plans are created equal
Your employer 40lk benefit match will vary from employer to employer. When accepting a position, here are some issues to consider before accepting an offer.
1) Vesting period: There is a period of time that an employer may take back their match they've contributed. This is known as a vesting period. If your employer has a 4 year vesting period, you must stay employed for the full 4 year period to be eligible for the full amount of the match your employer contributes. For example, your employer contributes $1000 to your 401k. After two years, you quit, get fired or laid off. Your employer will take back $500 of their contribution. You still keep any money you've invested, plus the $500 (half)of your employer's contribution.
2) Waiting period: Some employers will make you wait a year or more before being eligible for their 401k plan. Before switching jobs, ask if there's a waiting period to join their savings plan. This could have a huge effect on your retirement. Even skipping one year could have a dramatic effect on your overall retirement savings.
3) No retirement plan: If you have the option of accepting one job offer over another, not having a 401k or retirement plan should play a huge roll in your decision. Think of accepting a job without a retirement plan as equal to taking a pay cut.
Start your retirement planning early. Be a consistent investor. Having enough money for retirement is well within reach for most people.
The article above is information of a general nature and the information provided may not apply to your personal situation. Please consult your financial planner or licensed professional for investment advice.
Larry Lane is the editor for www.Investorzoo.com, a social networking site specializing in personal finance.
Larry Lane is the editor for www.InvestorZoo.com, a social networking site dedicated to personal finance.
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