Free Money for Retirement
Retirement is right around the corner for many people, but unfortunately they are not financially prepared to stop working. The thought of retirement has become a dream or a risky proposition instead of a reward for all the years they spent working. Retirement is 25, 30, or 40 years away for many other people, and they are not even thinking about it. Although several years separate both groups, the one thing they have in common is waiting to save for retirement. Retirement and savings is kind of like death and life insurance. You need one because the other is going to happen, at least you hope so in the case of retirement, but many people do not want to talk about it or think about it. Unfortunately, just because you do not think about it does not mean it is not going to happen. Therefore, you should start saving now. If you are 20, you should start saving for retirement. If you are 30, you should start saving for retirement if you have not already started. If you are 40 or 50, you should start saving for retirement if you have not already done so. Really? Yes, even at age 50. It is almost never too late to start saving for retirement.
A lot of people pass up on an opportunity to begin saving that is right in front of them. Right in front of them at their jobs and their employers make it so easy for them. Many employers offer a retirement plan to their employees. They give their employees the opportunity to save for retirement on a pre-tax basis. These plans are known as a defined-contribution plan because employees are able to contribute to them. Depending on the industry you work in, a defined-contribution plan is known by a different and more familiar nams. 401(k)s are offered by corporations. 403(b)s are offered by public education entities and most nonprofit organizations. 457s are offered by state and municipal employers and some qualified nonprofit employers. Thrift Savings Plans (TSPs) are offered by federal employers. Although you may hear more about 401(k)s than the others, all of these plans are mostly them same.
If your employer offers a 401(k) plan or one of those other plans, you are able to make contributions to save for retirement on a pre-tax basis. Since the contributions are pre-tax, you do not have to pay tax on that money until you withdraw it from the plan. Also, it decreases the amount of taxes you have to pay in your income because the tax deferred money is not counted in your taxable income. (Example: If you make $30,000 per year and contribute 6% of your salary or $1,800 to your 401(k), then you are only taxed on $30,000 – $1,800 = $28,200) So you win in more way than one. Some employers will offer to match a certain percentage of the employee’s contribution to the 401(k). They may match 50% of your contribution up to 6% or 100% up to 6%. (In the last example if you contributed $1,800, your employer would match your contribution with $900 if there is a 50% match and $1,800 if there is a 100% match). That’s free money! Hypothetically, if you contributed $1,800 to your 401(k) for 40 years and got a $900 match each year and received an 8% return, you would have approximately $699,000 after 40 years. The same scenario without the match would result in approximately $466,000 after 40 years. That’s a difference of $233,000! As a bonus for contributing to your 401(k) plan where your employer matches your contribution, you would get almost a quarter of a million dollars toward your retirement… just for saving. Even if your employer did not offer a match, you would still have almost half a million dollars toward your retirement. Not bad. Saving pays, but you have to be patient.
40 – 50 years ago most employees worked for 30 – 40 years at the same job and could depend on a pension, Social Security, and personal savings. Today, less than 20% of employees have pensions, Social Security benefits are projected to decrease, and individual personal savings rates are very low. It’s more important than ever to save for retirement and to start saving early. If your employer offers a defined-contribution plan with a match, make sure you take advantage of the free money for retirement. Click here for more information about retirement plans. All the best!
The $1,800 example is for illustrative purposes only and does not represent an actual investment. This example uses a constant rate of return. Actual investments will fluctuate in value. The illustration does not include fees and taxes that would lower results. The illustration assumes a 8% rate of return compounded on a monthly basis. Investing entails risk, including loss of principal. Shares, when redeemed,may be worth more or less than their original value.
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