Last year, my nephew was graduating from college and preparing to begin his first job out of 'school. It was an exciting time and I am very proud of all that he had accomplished in his young life. I told him I would only give him advice: if your company has a plan (k) 401, contribute as much to it as you can afford from the start. You get used to not having that money in your paycheck, and using the concept of the time value of money, you'll be amazed how much you will save in 30 years.
So, what is a (k) plan 401 and how can it serve as an effective instrument to accumulate retirement income? A 401 (K) is a retirement savings plan by the employer that allows you to save money towards your retirement on a tax-deferred basis. In other words, you do not pay federal or state taxes on your savings or their investment earnings until you withdraw the money at retirement. With most 401 (k), the money is deducted from your paycheck before taxes are removed which reduces your current taxable income. Some plans also offer a Roth option where you pay taxes in advance and contribute after-tax dollars. Consequently, there is no tax liability when you withdraw money when using the Roth. With uncertainty about future tax rates, it is useful to consider both options when available.
Many employers match a portion of employee contributions made to their 401 (k) account. That amount varies, but is usually 25 to 100 percent of your contributions up to a certain percentage of your salary. You may have to work for the company for a minimum period of time before becoming 100 percent invested in the company corresponding amount. You are always 100 percent acquired in your own contributions.
There are no guarantees in life, but if you start investing early with an intelligent allocation strategy, chances are very good that you could retire with a substantial nest egg. Start early and stay the course.
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