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Why Should I Contribute To My 401(k)?
By Sean Condon, CFP®
Why enroll in your 401(k)? The simple fact is that WHEN you start saving outweighs how much you save.
Contributing to your 401(k) is not easy, that’s for sure. Between student loans, a mortgage, car loans, and hungry kids, finding a way to contribute to your employer’s 401(k) plan might be the last thing on your mind.
It’s completely understandable. But in my opinion, it’s a costly mistake. See, funding your 401(k) may seem like a struggle, but if you find a way to make it work, there’s a huge financial upside.
Here are three reasons why you should start contributing to your 401(k) as soon as possible.
1. Save On Taxes
Contributing to your 401(k) can lead to significant tax savings, both now and when you retire.
Since your 401(k) contributions are deducted directly from your salary, you’ll have less taxable income to report, and if you’re lucky, you may even get bumped down a tax bracket.
Not only that, but when it comes time to withdraw, you’ll save even more. Chances are that when you’re retired, you’ll be in a lower tax bracket than you are now as a full-time employee.
Why pay more taxes if you can avoid it?
2. Let Your Employer Fund Your Retirement
Retirement is getting more and more expensive (especially for the unlucky ones who won’t see a dime of Social Security). In other words, you should take all the help you can get.
If your employer offers to match your contributions, why not max that out? They’re literally offering you free money—all you have to do is save for retirement (something you should be doing anyway).
Even if you can’t make the maximum contribution each year, you should at least try to contribute the maximum your employer is willing to match. If not, you’re leaving free money on the table.
3. Exploit The Power Of Compound Interest
Want to know the secret formula to a cushy retirement?
The magic ingredient that makes compound interest work best is time. The simple fact is that WHEN you start saving outweighs how much you save. Go ahead and click the above link which demonstrates how the math works in your favor. It’s really that simple. The best way to ensure that you retire with a respectable nest egg is to give your money time to grow—earn interest on your interest, year after year after year. The earlier you start contributing, the longer your money has to snowball.
4. Set it and Forget it
We all know the feeling of making a great plan… and not executing. Things get in the way and we never get around to act. One of the best ways to form good habits is to minimize the amount of decisions you need to make to work toward a goal. Setting up a 401(k) contribution does just that: make an election one time and your savings will automatically be deducted from your paycheck, no further action needed. You probably won’t even notice the money is deducted. An additional savings hack: each year increase your contribution by a few percent. After a few years of adding this additional percent, you will more likely be maximizing your contribution and benefits.
Regularly contributing to your 401(k) is a huge step in planning for a successful retirement, but there’s still a lot of work to be done. At Windgate, we can help you create a big-picture plan for retirement so you know exactly what you need to do to stay on track.