Contribute to your Employer’s 401(k)
The previous post in this series covered the importance of getting a job. Once you have that job, you’ll most likely have the opportunity to begin saving for retirement by making pre-tax contributions to your employer sponsored retirement plan. In most cases, this is the 401(k). Some basics on the 401(k):
- You can elect to have a portion of your wages paid directly, or “deferred”, into your 401(k) account.
- In participant-directed plans (the most common option), you can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above.
I highly recommend starting this as early as possible in your career; primarily because of the effects of compounding interest (see this great article on the topic). But also because of the employer match.
Get That 401(k) Match!
Often times, to encourage saving, your employer will match your contributions up to a certain percentage of your income. For instance, let’s say your employer will match your contributions up to 5% of your income. Let’s pretend you make $12,000 a year. If you contribute 10% of your income ($1,000), your employer would match half of that. That’s $500 that you didn’t have before, and it was given to you tax free. How cool is that!
It’s hard to believe that someone would not take advantage of this great deal. But people pass this up every year. This study found that
“roughly half of employees who could get a company match in their 401(k) plan with no strings attached were failing to take advantage.”
Unfortunately, there was a time when I was one of these statistics. Unlike my wise wife, who has been contributing to get the match since day one, I didn’t start until three years ago. Before then, I was only investing in mt IRA. The study goes on to add that “oftentimes the decision not to participate is emotional rather than logical. The plan sounds like a good deal, but employees think that there must be a catch somewhere.” In my case, it wasn’t emotional, I was just being dumb.