We all dream of the day when we can retire, live on the beach, and drink Pina Coladas ‘til sundown. Or maybe your idea of the perfect retirement is to simply have enough money to live comfortably and do a little traveling. These are wonderful ideas, yet how will you afford to do so?
Whatever your dream might be, taking advantage of your company’s 401(k) plan will put you in the right direction. By contributing to your 401(k) plan, the small contributions you make today can add up to a significant amount tomorrow.
So, if this is all it takes, then why do so many Americans opt out of joining their plan? The answer is both simple and complex.
Most Americans are hard-working and responsible. Some have college degrees, others do not. Some are single, others married with children. Some grew up in homes where money wasn’t an issue, others had to do without. Rich or poor, educated or not, we all have obstacles that keep us from saving money and achieving our goals.
So let’s look at the reasons why you might not be investing in your company’s 401k plan:
• You’re living from paycheck to paycheck
• You don’t understand the market and don’t want others to know that
• You don’t plan on staying with your company for long
• You believe you have plenty of time to save; you’ll do this later
• You’re going to live for today and not worry about tomorrow
Some of these are very legitimate reasons. Most of them stem from fear.
It’s not easy living paycheck to paycheck. But, in order to get out of this vicious cycle, certain sacrifices have to be made. You can start small with your contributions, sometimes as small as $5-$20 per week (the price of a single fast food or quick-service restaurant meal)…and setting aside $20 per week quickly adds up to $1,000 per year. Don’t let fear keep you from taking advantage of any company-sponsored contributions. A company contribution is money that your employer adds to your account on your behalf. That’s free money. Who wouldn’t want free money?!
No matter who we are, we’re all afraid of looking ignorant. The good news is, your company plan sponsor will try to help you along your path. They want you to win — because a happy employee is more likely a productive employee. They are there to educate you, help you achieve your financial goals, and make it as easy as possible to invest. Take advantage of this knowledge and expertise. Remember, “Courage is knowing what not to fear.”
- It’s easy to invest with payroll deductions. You can make automatic contributions directly and painlessly from your paycheck.
- Your plan is transferable. If and when you leave your company, it’s easy to roll over your money into another 401k at your new employer or into an IRA that you control. The money that you’ve previously set aside is yours, always. It’s your money, and it can readily go with you.
- Your contributions are tax-deductible and your money grows tax-deferred. You might also be eligible for the Savers Credit. This credit gives a special tax break to low- and moderate-income taxpayers who are saving for retirement.
- Remember, time is on your side. The earlier you start investing, the more time your money has to grow. If you wait to invest, you lose out on the compounding effect of your money making more money. For example, if you made only a single, one-time investment of $1,000 in 2020 and it earned an average return of 5% per year, you would have $1,276 after 5 years (2025), $1,629 after 10 years (2030), $2,653 after 20 years (2040) and $4,322 after 30 years (2050). Yet if you waited 10 years to initially invest, starting in the year 2030 instead of this year, by the year 2050 you’d only have $2,653, or nearly 40% less.
Sure, it’s easier to sit back and enjoy today and not worry about tomorrow, but frankly, I’d rather be sitting on a beach drinking Pina Coladas when it’s time for me to retire.
(written by: Denise)
