Every employee should have a retirement plan. A retirement plan will provide financial security so that the retirement years are enjoyable years without financial distress. Some employees say that they cannot afford to save. The truth of the matter is that they can no longer afford not to save. Social Security is on shaky ground, people are living longer, and seniors do not want to be a burden to their children. Saving for retirement is a must, and the sooner you start, the better.
To save for retirement, employees are encouraged to contribute to a 401k. There are several benefits to contributing to a 401k. Below are three of the most important benefits:
- Free Money - Employer Matching: Most employers will match an employee's 401k contributions up to 6% of the employee's regular earnings. This is free money. Even if an employee does not have the resources to contribute the annual maximum (For 2009 -$16,500, under age 50; $22,000, age 50 and older), it is smart for all employees to take advantage of this free money by making contributions up to the full amount of the matching. For example, an employee has a monthly salary of $2,500. The employer matches 5%, or $125/month. The employee should contribute $125 monthly to the 401k. When the employee's contribution and the employer's matching amount are combined, the employee has a total monthly contribution of $250. That is a 100% return and $125 free money each month for retirement savings!
- Tax Savings - Pretax Dollars: Employee 401k contributions are pretax dollars. This means that no taxes are paid on the 401k contributions, and the taxes are deferred until the funds are withdrawn. All contributions and investment income grow and compound tax deferred, so the 401k retirement funds have the potential to accumulate and grow faster.
- Diversification: Diversification is a method of managing and reducing risk by spreading the investments over several types of investment categories. The idea is to avoid "putting all your eggs in one basket." The 401k has several diversified investment options, ranging from stable guaranteed funds to high risk investments. You, the employee, decide how to invest all 401k contributions based on your risk tolerance. New 401k contributions can be put in several investments in various percentages. Later, you may change percentages or transfer existing funds to different investments easily online or by phone. You are in control of your 401k retirement savings.