With the near extinction of the “gold watch and nice pension” for a career well done, the burden for a financially secure retirement now falls on the shoulders of you, the employee.
However, that doesn’t mean your employer isn’t trying to help you out. Most companies offer employees the option of contributing to a 401(k) retirement account, while some companies even match a certain portion of your contribution – but more on that later.
First off, a 401(k) account is a tax deferred retirement account. In plain English, that means you contribute money directly from your paycheck to your 401(k) account. Because you never “touched” the money, you do not pay taxes on those earnings. The money you put in your 401(k) account can be allocated to stock, bonds, mutual funds and/or money market accounts; it all depends on the company your employer uses.
For example, if I have a monthly income of $1,000 and contribute 10% of that to my 401(k), then I will only pay taxes on the $900 I physically receive. Not a bad deal.
However, when you begin to withdraw money from your 401(k) account upon retirement (or under very specific circumstances), you will have to pay income tax on the money at that point. Thankfully, since the money has been allowed to grow tax free for (hopefully) many years, you will definitely come out on top.
With most 401(k) accounts being tied up in stocks, bonds, mutual funds and/or money market accounts, there are risks associated with this type of investment. You are not guaranteed any return, and may ultimately have less than what you started with.
For example, remember Enron? Many employees of Enron lost all of their retirement when the company went belly up because they had a significant portion of their 401(k) tied up in company stock. So, if you have a 401(k) account or plan on starting one, I urge you to speak with a professional financial planner to get help in determining the correct retirement/investing strategy for you.
All of that being said, there is one way to ensure you get a return on your 401(k) investment – TAKE ADVANTAGE OF EMPLOYER MATCHING!
Many employers will match an employee’s 401(k) contribution, up to a certain amount. Essentially what that boils down to is an automatic return on your investment.
Let’s go back to the previous example I used, where I contributed 10% of my $1,000 salary every month. Let’s say I work for an employer that matches every $1 of my contribution with a $.50 contribution of their own. That means each month when I put in $100 my employer will put another $50 in my account for me.
That’s an instant return of 50%!
Granted, this is just an example, and not every company will match this well, but no matter what your company matches, the moral of the story is it is an automatic return on your investment, and you’d be a fool to pass up this free money – which could eventually mean hundreds of thousands of dollars towards retirement.
So, if you haven’t started a 401(k) account, I highly recommend you go and talk to your company’s human resources department to find out how you go about setting one up. Once you have an account set up, or if you already have a 401(k) account, I suggest you meet with a financial planner to determine the investment options that are best for you.