We all know we need to save for retirement. The question becomes: Where should I save my money? The simple answer for many will be their work 401k plan. I want to give you five advantages of a 401k plan. Most people have a 401k plan, but they do not know how to take full advantage of a 401k plan.
#1 Just start saving money in 401 Plan
Most people associate a 401k plan with the stock market. The stock market is viewed as a risky investment. Therefore they do not want to save any money in a 401k plan. First of all you do not have to invest in the stock market if you feel it is too risky. This is a great advantage of a 401k plan because you can choose to invest only in bonds or even a guaranteed investment.
Now investing in only bonds may not give you the higher rates like stocks, but you will not have to worry about huge declines in value. However, a big mistake people make is not to save any money at all. Following a plan of not saving will only guarantee you will work forever.
#2 Company Match = Pay Raise
Typically employers offer a company match if an employee saves money in the 401k plan. A common company match is a 3% match. For you the employee a 3% match means if you save 3% of your paycheck in the company 401k plan then your employer will match this same 3%. Here is a mistake many people make when saving in a 40k1 plan. They decide only to save 1% of their paycheck, but the employer will only match the same 1% and not 3%.
Do not give up a 3% pay raise by not saving any money in the 401k plan. The company match is one of the great advantages of a 401k plan. Just by saving a little amount of your pay will lead to a pay raise. What a great benefit.
#3 Pay Less in Taxes
Who likes to pay taxes? No one. Well by saving money inside of a 401k plan can reduce your taxes. The government allows you do deduct any money you save inside your 401k plan. For example, you decide to save $2,000 into your work 401k plan the government allows you to deduct the $2,000 from your wages. If you earned $50,000 the government allows you to subtract the $2,000 from your income. In other words you would only have to pay taxes on $48,000 vs. $50,000.
All during your working years you can continue to save money in your 401k plan without having to pay income taxes. However, when you retire the government does want to start collecting taxes on your 401k savings. When you do start withdrawing money after age 59 1/2 you will pay current income taxes only on the amount your withdraw from your 401k.
Remember you only pay taxes on the money you withdraw; the remaining balance continues to grow tax-deferred. Deferring your taxes later in life is one of the huge advantages of a 401k plan. As I stated earlier just starting to save money in a 401k plans opens up all these advantages.
#4 Professional Money Management
In a 401k plan you only have to pick the mutual funds, not the individual stocks or bonds. Professional money managers who have expertise in researching companies pick the investments inside the mutual funds. By investing in mutual funds inside your 401k plan saves time and money. You do not have to do your own research on each individual company. A typical mutual fund has between 100 to 300 different companies.
As an investor I know I do not have the time or expertise to research 100 companies to decide how to invest my money. Not having to pick our own individual investments is another one of the skey advantages of a 401k plan.
#5 The Money is Yours, Not the Companies
A common mistake people think about a 401k is the money is tied to the company. People believe if the company goes out of business they will lose their money. This is incorrect because the money is invested separately at a mutual fund custodian company. Your employer does not have any access to your 401k plan money.
The only amount of money an employer could keep if you leave the company is the company match. Some employers have a required amount of time you need to be employed at the company before you receive the amount they matched in your account. This is known as the vesting schedule. Companies may require you work at the company for three years before you receive the money the company contributed to your 401k plan.
However, they never have any right to the money you personally saved in the 401k plan. This is your money, not theirs. Not having to pick all your own investments is another one of the advantages of a 401k plan vs. a pension plan. Potentially an employer does not have to honor a pension plan if the company goes out of business. If you believe this could not happen to you just look at some of the airline and steel companies. When the companies went out of business they did not have any money to pay for the employees pensions.
Final Thoughts
We all plan to retire someday. To retire successfully we need to have some cash saved up to pay our living expenses during retirement. We cannot depend entirely on Social Security or a company pension. We do not have any control if the government or your employer decides to make changes in the future.
A 401k plan can give you some control of your retirement plan and your future. However, you do need to review your account periodically to see if changes need to be made.
Overall there are significant advantages of a 401k plan to your retirement plan. Take the time to review these advantages for your own retirement savings.
Types of 401(K) Contributions
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