401K, Why You Need it More Than Ever

Why establishing a 401K is especially important these days.

She Reports

5 Reasons Why You Need Your 401(k) Now More Than Ever

Saving during the stock crunch

-Jennifer Hamilton

happy woman below money signSo here I sit … realizing that I have a nice chunk of my paycheck going into a 401(k), when there’s so much I could be using that money for in my already-happening life. Yet, I don’t do anything to move that money back into my directly receivable stash, instead leaving it where it is to stew in preparation for years down the road. Why do I do this again, especially while the stock market is as unstable as it is?

For several reasons:
1. I’m paying less in taxes now, and will pay less in taxes in the end. 401(k) plans are defined contribution plans, where employees (you) elect to place a percentage of your salary to contribute to the plan. This reduces your taxable earnings, and any earnings on the 401(k) are deferred until the money in the account is withdrawn at retirement. So, you pay less in taxes now, and your earnings on the 401(k) won’t will only be taxed at the rate for your income later on down the road – which is likely to be lower than your current rate.

2. Employer matching, it’s like money for free! Many corporations match a percentage of employee contributions to 401(k) plans – where you contribute 6% of your salary, for example, and your employer contributes 3% of your salary. Each company has their own requirements for company matching, so check with your Human Resources department for information about that.

3. Diversification equals safety in today’s market. You have a lot of choice of what funds to put your investment in, whether it’s a growth fund – where you can have large gains, but also large losses — a bond fund, or a fund for optimization at a certain date. Your investment’s not going to be worth a hoot unless you’ve got some protection from a failure in one area, by having your money spread around.

4. My 401(k) is now my Social Security. If you’re expecting to rely on Social Security, like previous generations, put down the overpriced coffee and face facts. We’re going to be very lucky to get a fifty-cent Social Security check in 35 years, if we get one at all. If you’re planning to base your entire retirement on Social Security, you’re likely to still be working to meet daily requirements – even if your home and car are both paid off, with increasing medical costs and the like.

5. Your retirement is a long-term investment – so while things look awful now, the market will likely be completely different in a couple of years, and by then, you’ll have a nice little chunk stashed away. It doesn’t matter how much you contribute, just do it.

Justification can be found, even if it seems way too grown-up.

Tell us: have any good reasons of your own for putting money in your 401(k)?

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