Why You Should Have a 401K Plan

Today I am wearing my accountant/financial planner hat. I have so many friends who don't have a retirement account. I have never really understood why they do not jump on this because it is FREE money. Yes you work for someone and they give you something extra when you sign up for their 401K plan.

Here is how it works. If you work for a company that offers a retirement plan as one of their benefits please go call Human Resources right now and tell them you want to sign up. If you are super skeptical then start with maybe 1% of your salary, that's peanuts and I will argue this until I am blue in the face. You can spare 1% of your weekly or biweekly check.

Your company probably matches you 100% up to 3% that means as long as you have signed up your company will contribute whatever you contribute up to 3%. So if you start doing 1% and your company matches 1% then you will not lose that money because your company will match your contribution.

Then now comes in the beauty of it COMPOUNDING INTEREST.

I will attempt to explain to you using chart below from JP Morgan.



So say you are Susan and you started contributing $5,000 towards your 401K when you were 25. If you get paid every two weeks this means you took a whooping $192 out of your paycheck every two weeks. Think you can afford that?
Another scenario is, if your company matches you and you each contributed half that means you took $96 out of your paycheck and your company matched you and paid $96 so in total you invested $5,000.

Being Susan you put only $50,000 for 10 years. Then you stopped at 35. You don't take that money out of the plan you let it seat and grow while you wait to retire. By the time you are 65 you will potentially have $602 thousand in your account due to compounding interest. That's assuming also the growth rate is as projected. However even if it does not grow at this rate show me a savings account that will give you this return. Also even though she stopped contributing she still has more than Bill who contributed $100,000 more than her!! Why because her money continued growing.

If you are Bill you start contributing $5,000 at 35 and stop when you are retiring at 65. He contributes $150,000 in that time frame because he is trying to catch up. He has lost 10 years.Notice that even though Susan stopped she still has more money when she retires because she started early. The power of compounding my friends. Remember also that Bill contributed $100,000 more than Susan. That's money out of his pocket!!! Yikes!!!

Next look at Chris who doesn't stop like Susan. He continues to contribute until he retires. So he contributes $200,000 which is quite a lot of money when you think about it. However look at his retirement account $1.1 million. That is what he is projected to have when he retires. Friends think a 401K account might work for you? He may have contributed more but remember as you get older you potentially make more money which means the $5,000 per year which is now a fixed expense becomes easier to afford.

If your company doesn't offer a 401K plan there are many other ways of investing in your future. Shoot me an email or comment if you have any questions. I will post about the different places you can use to invest your money if your company doesn't have a 401K plan in the future.

Listening is loving....

2 comments:

  1. Really useful to read this, even though my counting skills is not the best. The things we always procrastinate.

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    1. Yes Yvonne if you don't have one then you should definitely get one : ).

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