Saving for retirement is one of the most important financial decisions you can make. Without retirement savings you may never be able to retire or if you are forced to retire, you find yourself completely dependent on the government for assistance. It is smarter to take control of your retirement savings now, while you have options. But looking at retirement options — ranging from a Traditional IRA to a Roth IRA to a 401k to a 403b — can be an overwhelming task if you are just starting out. How can you simply the process?
The easiest way to get started saving for retirement is to use your employer’s 401k plan. Many large and medium-size companies provide this retirement plan option for their employees. Here are a few reasons participating in your employer’s 401k plan is a great idea.
Starting with a 401k is a good idea because the mutual fund investments you have to choose from have already been narrowed down by the company. You probably get some paperwork associated to a 401k when you are first hired, so you don’t have to take a lot of time to research accounts — the paperwork is sitting right in front of you.
This can have a downside because the mutual fund options may not be the absolute best that you could find, but that is okay because what matters more is having the right asset allocation and getting started as early as you can. The cost of not participating or delaying so you can make “perfect” investment choices is much higher than just getting started.
Many employers have now automatically enroll their employees into the 401k plan when they are first hired. As you go through your paperwork there is an option to not automatically enroll, but a majority of people go ahead and sign up. Automatic enrollment usually starts you at about 3% of your pay, and most people don’t miss the amount from their check. However, 3% is probably not enough savings for you to retire on, so be sure to go back and increase the percentage if you can afford it. (You can also change the contribution amount when you first sign up for the plan.)
A nice benefit of having your retirement investing come out of your paycheck is you don’t have to make a conscious decision to send money in to a brokerage firm. If you have to sit down every month to log in to your brokerage account, and consciously make the decision to send money from your bank to a company — even if it is for your ultimate benefit — you may not do it. You may not even remember to do it. With a 401k, you are investing the money automatically with minimal obstacle.
One of the greatest reasons to use your employer’s 401k plan is many companies will match how much money you save for retirement. Every employer is different, so be sure to learn how your match works. One company might match your contributions dollar for dollar up to 6% of your pay, while others might match 50 cents to the dollar of every dollar contributed up to 5% of your pay.
In the first scenario if you saved 6% for retirement the company puts in another 6% on your behalf out of their own pocket. You would be getting 12% of your salary in your retirement account, but only have to put in 6%. Likewise in the second scenario if you invested 5% of your pay, you would really get a total of 7.5% of your salary put toward your retirement because the 2.5% is free money from your employer.
Employer matches are one of the most powerful forces in retirement saving. Even if your employer doesn’t offer much of a match, you should still contribute enough to at least get the match. Otherwise you are turning away absolutely free money.