Many times young adults just entering the workforce aren’t getting paid as much as they would have hoped for. For this reason some are not looking into their company’s 401(k) offerings because they don’t want to start saving money that they shouldn’t touch for about 40 years (at least). When you are young you often get caught up in the “here and now” and forget about the future. However, preparing yourself for your future is one of the best ways to start off your career.
According to Schwab Center for Investment Research, young employees in their early 20’s should be saving about 10% - 15% of their paycheck into their 401(k) if they want to be prepared for the future. However, the average rate of savings among this generation is only at about 6% (not nearly enough).
Here some top reasons that you should start a 401(k) ASAP:
1. Tax Benefits
The money that you are putting towards your 401(k) comes out before you are charged for taxes. This way although you cannot touch the money (or shouldn’t touch the money) until you are ready to retire, your income is getting taxed less than it would if you were not putting money towards your 401(k).
2. Company Matching Contributions
If you find yourself in a bind for money right now, at the very least try to contribute as much money as you can so that you can benefit from your company matching contributions (remember: every penny counts!). Many companies give their employees a match on their retirement savings. This means that if you contribute $1 towards your 401(k) often times your company will match you 50 cents per dollar up to a certain percent of your contribution (usually 3%-5%). This is money that you are getting just for investing in a 401(k) and carries with it no risk.
3. Preparing For Your Future
This is one of the biggest reasons that a 401(k) is important. When you are in your 20’s, retirement seems light years away. However, time goes by so quickly that it will be here before you realize how much time has gone by. Putting off investing in your 401(k) won’t benefit you in the long run. With the market currently the way it is, people are afraid to invest in anything, but eventually things have to turn around and you will be happy that you were saving while you were young.
4. Target-Date Funds
Under this, your 401(k) automatically maintains a diversified portfolio of stocks and bonds. For many employees who do not completely understand the market and are too afraid to take big risks and lose their money, a target-date fund may be useful. However, our partners at MainStreet.com suggest that target-date funds are not always as easy as they appear and might still involve some risk. Check out the full article here to learn more!
Don’t let not understanding your 401(k) be a reason to not invest in this saving initiative. Ask your company for help in further understanding what your 401(k) has to offer and do your research online as well. If you do not take the initiative to understand your 401(k) and your future you may find that you are in a bind when your retirement time arrives. Even if you feel too young to start saving, it is always better to be safe than sorry. Knowing that you started to put money towards your future when you were young will be a big weight off your shoulders as the time approaches for you to retire.
Photo: Michael Connors
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