The Importance of Contributing to a 401k

Even if you’re just starting your first real job, it’s time to start thinking about retirement. That’s not a comment on how motivated or unmotivated you are, or a suggestion that you should wish your life away. It’s just reality.

That’s because you, like many people, will be responsible for supporting yourself during the 20 to 40 years you can expect to live after you retire. To do that, you need a source of income that will stretch further than the safety net of Social Security and be more reliable than winning the lottery.

Some—but increasingly fewer—employers offer traditional pensions, which pay you retirement income based on your final salary and time on the job. Others contribute to a cash balance, profit sharing, or other plan on your behalf. But most employers offer you, instead, the opportunity to participate in a salary reduction plan, such as a 401(k) or 403(b).

On the Bandwagon

If your employer offers a 401(k) or 403(b), it’s usually the most painless way to set aside money for the future. All you have to do is agree to have a percentage of your gross income to be withheld each pay period.

Participating in one of these plans has a few possible advantages:

• Any tax-deferred contributions reduce your current income taxes since they’re subtracted from your income before tax withholding is calculated.
• Contributions to a tax-free Roth 401(k) or 403(b) aren’t deductible. But when you withdraw after 59½, your earnings are tax-free (as long as your account has been open at least five years).
• Many employers match a percentage of the contributions you make, building your retirement funds even faster.

Why now?

When compounding is involved, time is money. The more years that you add contributions to your plan, and the more years that any earnings increase your principal, the larger your account balance has the potential to grow.

Of course, there are no guarantees about either the rate or the regularity of the earnings. They may be awesome one year and dismal the next, or they may go through longer, but still alternating, periods of growth and decline. That’s the reality of investing. Having time on your side means that bumps in the road, like a period when investment prices go down and your account value shrinks, don’t have to be fatal.

 

Get in touch
with one of our Financial Advisors today to learn more about planning for your future.

 

This blog was written in partnership with our financial partner, Banzai.

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