Saturday, August 25, 2007

The Importance of a 401K

In September I will have been working for my company for a year. This means that I am now eligible to take part in our company's 401k plan. I have friends that think it's ridiculous that I am so excited to finally be able to contribute to a 401k. What do I need to worry about retirement for? I'm only 25 years old! Well, for me it's not just retirement I'm thinking about. The 401k is a component of my wealth and as my 401k grows, so does my wealth. Since I receive a nice match from my company for my 401k, my wealth will grow at a much quicker rate then if I am just putting this money into a savings account or even an IRA.

At the beginning of the year I began contributing 5% of my salary to a IRA. I decided to do this so that when the time came to contribute to my 401k I would be used to the 5% less in my paycheck. At the same time, I would get a head start in retirement savings and now I have a little over $1,500 in retirement savings already. The plan was to contribute to the IRA until I was eligible to participate in the 401k and then switch the funds over. Now, I have decided that I can do some more adjusting and am going to continue contributing to my IRA while also contributing an additional 5% to the 401k. If I put in 5% in the 401k, my company will put in 4% of my salary as a match which is the full match. Here is the good part. With my contributions and the company match, my retirement savings will grow to just over $921,000 by the time I'm 60 years old. This is assuming an 8% rate of return. If I decide to start contributing more or my annual salary goes up from it's current level (which it better) then I will have even more money. If I decide to wait until I'm 30 years old before contributing, then this will change my end amount down to just over $599,000. That's a huge difference of $322,000!! Wow, I know I will be glad I am getting started right now. And for those that argue that a million dollars in 35 years won't be worth as much as it is right now, yes you are right. But, a million dollars in 35 years will be worth more then half a million dollars in 35 years. That is a promise.

The lesson of this post is if you have the opportunity to contribute to a 401k then get started right away. If you don't have the opportunity, then open up an IRA and start contributing what you can.

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