If your employer offers a 401K retirement plan and you aren’t taking advantage of it and maxing it out, you could be missing out on an easy way to invest for your retirement.
Plus, signing up for automatic deductions could put your retirement investing on autopilot, meaning one less thing for you to have to worry about. The money you invest in your 401K comes right out of your paycheck before you even see it (and without taxes taken out of it), and that helps you invest better. Because that money is invested before it becomes part of your regular monthly budgeting, chances are you won’t even miss it.
Funding your retirement directly from your paycheck is a prime example of the “pay yourself first” approach to investing, and it’s the number one way everyone who uses it can gain enough wealth to have the retirement they want. By paying for the most important expenses first – especially investing in your retirement – you leave the rest of your income free for spending, saving, or meeting your other needs. The key to maximizing the benefits of your 401K is to treat your retirement account like a bill you must pay and to make sure you keep on investing in your account for as long as you’re working.
You don’t have to invest huge sums to end up with a nice nest egg at retirement. An investment of only $200 per month in stock mutual funds over 35 years (assuming you’re about 30 now) with an average 8 percent projected annual return would yield a respectable $428,573.52 by the time you’re 65. And that’s without figuring in any raises.
Instead of thinking of it as $200 a month, suppose you arrange it so your 401k contribution is a percentage of your salary; that means every time you get a raise, your contribution will increase at the same rate as your raise – but it could still be automatically deducted, which means it will continue to be taken right out of your paycheck before you have any temptation to spend it. A $200 monthly contribution on a $50,000 salary is about 4.8 percent. Now suppose you get a five percent raise each year during your 35 years of employment. Instead of continuing to invest $200 each month, your annual 401K contribution will automatically adjust to 4.8 percent of your new annual salary. After 35 years of allowing your contribution to automatically adjust, you’d have $768,358.56 in retirement savings. Even if your industry offers only an average 2 percent annual raise, you’d still have saved $529,909.64 for retirement.
The IRS does have limits for how much you can contribute to a 401K each year. For 2013, you can contribute up to $17,500 plus up to an additional $5,500 if you’re over age 50. If you make a high salary, do everything you can to max out your contribution up to that limit.
Think it’ll be too hard to have $200 a month taken out of your salary? Think of it this way: over a 30-day month, that comes out to $6.67 a day, or about the price of a fast food burger meal. It’s really not too painful to sacrifice a little now so you can live a lot better at 65.
Treat your 401K as a gift to yourself, and you’ll thank yourself later! If you ignore this advice, you’ll look back later and realize you made the biggest financial mistake of your life.
The IBSS Staff