We just graduated college and just got our first real job. Great! Congratulations! Now what? As we make our way through our first few weeks on the new job we are bombarded with emails, packets of information on everything under the sun from employee discounts to the dreaded RETIREMENT word, eeek. Well you stumbled across the right website to point you in the right direction. I will have you sipping those dirty martinis out at the beach house enjoying the afternoon rays.
You are set up at your desk and looking around at the mountain of paperwork that HR has given you. I need you to look through everything for the packet that says 401k! Great you found it. Take a deep breath I know it looks foreign at this point. I know you are thinking how will I ever understand the material that says take this percentage of that and this percentage of my pretax income gets contributed here and my employer will contribute this much up to a certain percentage.
What exactly is a 401k? A 401k is an employer sponsored savings plan that is set aside for you in an investment vehicle meant to appreciate over time to save for retirement. The funding of the 401k is done with pretax dollars, which means that it is not taxed until you receive the distributions.
Why invest in a 401k, why can’t I just put my money in the bank? The money set aside in your 401k is pretax which lowers your overall pay now and reduces your tax liability. This is helpful because if you were to just set money aside in a bank, you would still have to report 100% of that income when it came time to visit the accountant or sit down with your tax software and figure what to pay. Also, with most plans there is an employer match; the employer matches up to a certain percent of your salary that you contribute. The most popular employer contribution match is 3%
How much should I contribute? Simple, as much as you can afford to go without. You will reap the rewards when you are set to retire, and you see all your friends who didn’t read this blog struggling. If you are not able to set aside a large portion, atleast set aside enough to get the matching portion that your employer gives. It is free money from your employer, so why not get free money to save for retirement which you have to do anyways.
How does matching work? Assume you make $40,000 and your employer matches 4% and you wish to contribute 4%. You would contribute $1,600 to your 401k and your employer would contribute an additional $1,600, which is the match. The company will not contribute more than this for the year.
Now that you made it through your 401k material, we will tackle another retirement topic at another time. How much did you decide to put aside for retirement? How much does your employer match? Is there another topic that you would like to see covered that you came across in your HR paperwork?