Yes, you really ought to sign up for your employer’s 401k plan. We understand that you’re young and you’re still a good four decades away from retirement. We know you want to have the freedom to splurge and have a good time with every paycheck you receive.
You won’t stay young, forever, though. And time can creep on you faster than you realize. In this day and age when companies don’t anymore offer pension plans and the future of Social Security is uncertain, the onus of funding your retirement is on you. The earlier you start contributing to your retirement savings, the better prepared financially you will be for your twilight years.
Retirement doomsday scenarios aside, contributing to your employer’s 401k plan is in your best interest because of the following reasons:
It makes retirement savings automatic
One of the most important features of a 401k plan is that it makes saving for retirement easy, convenient and automatic. All that you need to do is sign up for the plan and inform your employer how much you want to contribute to your account each year. The company then deducts the equivalent amount from your monthly or weekly paycheck and puts the amount straight to your account. You don’t have to do the transfer yourself.
With the passing of time, you’ll realize that you don’t anymore miss the amount taken automatically from your pay. Most individuals find it difficult to discipline themselves to save if they have to write the check or go to the bank themselves to put the money in their savings account. With a 401k plan, the money does not even have to pass to your hands. You’re actually saving without really thinking about it.
Your employer could provide matching contributions
One of the best things about enrolling in a 401k plan is that your employer could provide matching contributions. The typical employer match is 50 cents for every dollar contributed by the employee for the first 6 percent of pay. Some employers are much more generous, matching employee contributions dollar for dollar. This is one of the draws offered by companies to recruit the best talents.
What’s the big deal with the employee match, anyway? It’s free lunch and one way for you to beef up your retirement savings without having to do overtime or perform other extra work. Take note, however, that the employer’s counterpart is usually subject to vesting. That means you will have to work for a number of years before the employer’s contribution becomes fully yours. Each company follows different vesting schedules so you should know what the protocol is in your company.
What if your employer has a 401k plan but does not offer matching contributions? Should you still sign up? Definitely. The employer match is an added perk but the 401k plan itself is designed to help you save for retirement with our without it.
You get tax breaks
Another reason to sign up in your employer’s 401k plan is the fact that you get a lot of tax breaks. The contributions you put towards your 401k are taken from pretax dollars. That means a lowered tax bill. Moreover, your contributions are allowed to grow tax-deferred so your earnings will grow faster. You will eventually have to pay taxes but that is only when you withdraw your contributions upon retirement.
Don’t miss this opportunity. Sign up with your employer’s 401k plan.