Saving for retirement is something that most Americans worry about on a frequent basis. Will I have enough saved for retirement to continue living comfortably? Should I have started saving for retirement sooner? What’s the best way to save for retirement? These are all questions that seem to circle our minds often. Are you contributing to your 401K plan regularly? If you’re worried about retirement, here are five major reasons why you should begin contributing to your 401K plan right now.
According to the United States Bureau of Labor Statistics, over 70 percent of 401K plans offer some form of matching contributions.
“A common employer match we see is often 50 percent of the employee contribution,” explains Two Rivers Bank & Trust Vice President Brett Bessine. “This means that for every dollar you decide to put into your 401K plan, your employer will match a portion of your savings—often up to six percent of your annual compensation.”
So, for an individual with an annual salary of $35,000 who contributes 6 percent of their annual salary to their plan (about $2,100), they would receive an additional $1,050 (50 percent) in matching employer contributions each year under this format.
When you contribute a percentage of your salary to your 401K plan on a pre-tax basis, you reduce your taxable income. This tax advantage is due to the fact that your 401K contribution comes out of your paycheck before income taxes are deducted—this means that your taxable income is less, which in turn lowers your overall tax deduction. The tax savings equals more take-home pay.
Most 401K plans provide a variety of great investment options to choose from, including money market funds, bond mutual funds, stock mutual stocks, company stocks and stable value accounts. Each type of account offers a varying degree of risk and reward, so it is important to fully understand the benefits and potential threats of each investment option. Before making any investment decisions, talk with your financial advisor to further discuss your investment options and tolerance for risk.
The sooner you start saving for retirement, the faster your account will grow—and the longer you wait to begin saving, the harder it will be to catch up. In fact, some experts say that for every five years you wait to begin saving, you will need to double the amount you save each month to reach the same level of financial security at retirement.
For example, let’s say you began contributing $5,000 at eight percent interest to your 401K plan each year from age 25 to 35, if you did not touch your savings until age 65 when you retired, your account would be worth around $787,000. However if you started saving the same amount from age 30 to 40, your account would only be worth $364,000 at retirement.
For some individuals, it can be difficult to manually set aside a portion of each paycheck for retirement—more than 59 percent of Americans spend their entire paycheck—or more—each month.
“Participating in your employer’s 401K plan takes the hassle out of remembering to save, by sending money directly from your paycheck into your 401K account,” says Bessine. “It’s imperative to start thinking about your financial future, and contributing to your 401K plan makes it a simple, hassle-free experience.”
If saving for retirement seems to be a common worry in your life, Two Rivers Bank & Trust is here to help. Whether looking for information about retirement plans on a personal or business level, we offer a full line of retirement and financial services all designed to help make planning for your future simpler. Contact us today to learn more.