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 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. You only need to agree to withhold a percentage of your gross income 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 you compound, time equals money. The more years  you add  to your plan, and the more years that any earnings increase your principal. This means the larger your account balance is it 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.. That’s the reality of investing. Having time on your side means when investment prices go down and your account value shrinks, you will be okay.

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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