When you first started your job, you signed a bunch of new employment papers and within that stack of documents, you likely enrolled in your company’s 401k retirement plan. You likely picked a percentage of payroll to invest into the plan and how you wanted those funds invested, then you may not have thought about it much more. But the reality is that, for most retirees, their largest asset other than their home, is their 401k account.
It would be good to step back and really look at what kind of account this is, and how it helps you keep your desired lifestyle in retirement. For many retirees, stepping into retirement can make them nervous, especially when they are faced with the realization of no further paychecks coming in. With pensions being far and few, it is up to us to fund our retirement years, starting now.
How much do you need to have in your 401k by the time you retire to maintain your desired lifestyle? If you do not know that answer or never asked yourself that question, it would be good time to find out sooner rather than later. Do you need $1 million dollars, is that enough, or how about $2-$3 million?
A $50,000 a year lifestyle today, with a 3% inflation is a $104,689 lifestyle - 25 years from now. So, making sure you have enough to fund 20-30 years of expenses for the rest of your life, with the cost of living increasing post-retirement, is vital to factor in. Let compound interest and time work together for you to help grow your account to your desired need.
Traditional 401k’s allow you to save for retirement on a tax deferred basis, so you are kicking the taxes down the road until retirement. Every time you make a pre-tax contribution to your 401k, you are getting an immediate tax deduction now, then when you retire, the amount you withdraw is 100% taxable. In our working years we typically pay the highest income taxes, but the hope is that in retirement, since you don’t have earned income, you would be in a lower tax bracket and pay a smaller amount of tax when you withdraw the money.
You might be missing out on free money from your company if are not participating in your company’s 401k if they are giving a match. This simple idea can be confusing for some, but company’s may match your contributions up to a certain amount. For example, if the company match is 100% for your first 4% of contributions, if you put in 4% of your gross pay each pay period, then they would contribute an equal amount to your retirement account from the company’s pockets. So, for simple math, if your gross pay is $1,000 every 2 weeks, and you elect 4% pre-tax deferral, you would be contributing $40 that pay period. Your employer would also match your $40, so now you have $80 going in. That is an immediate return on your investment. It’s money that you do not want to leave on the table. We encourage you to ask your human resources department if you are taking full advantage of the company match, if there is one.
As you can imagine, with consistent contributions, a company match, compound interest, and investment performance, your company’s retirement plan is your best tool to save for retirement. No other retirement funding vehicles can compare to an employer sponsored retirement plan with a company match. For most, your 401k will be your largest liquid asset, so pay close attention to it, and make sure it is working well to meet your goals. Remember, in this case, time is really money!