If you work for a business chances are high you are contributing to a 401k plan. More and more employees are being automatically enrolled in these plans. And that is a great thing. But there are still 1 out of 5 employees that do max out even the low amount that a company matches. Basically they say no thank you to a portion of their salary the company willingly pays.
Then there are the rest of the masses. Only 13% of employees are maxing out, which is putting $19,500 into their 401k.
I totally understand. $19,500 is a lot of money. That is almost half of my salary! 3 out of 10 employees have NO emergency savings, according to Bankrate. A big chunk of American workers are living paycheck to paycheck. 45 million Americans have student loans.
For so many people the future does not look so bright. Now for the good news, where you go in the future is in your control.
The consequences of not preparing for retirement are real. This woman named Jessica came to a speech of mine. She wanted me to help her prepare a plan for retirement.
She was single, never married and in her 60’s working for a large company outside of San Francisco as a creative director. She was tired of working. She had been working since 25. That’s over 35 years.
She told me that she had NEVER saved for retirement. And I really mean never. She did not have a 401k or own any stocks. She rented a house and had credit card debt and leased her car. Which I am totally fine with if that is the lifestly that makes you happy. But you could easily tell she was not happy.
She told me she always thought negatively about money worried about how she was going to pay for things. She wanted to get off the treadmill, but she could not afford to quit. Things were going to have to change.
It does not matter how old you are, the best time to invest is today. You can always make better choices today that will improve your future.
So what advice did I give. First, she needed to do the internal work. What did she believe about money? Her mindset about money was holding her back.And how was she going to change emotions around it. She told me that she viewed herself as a “creative” and that money was too complicated. But look at all the people that creative and rich!
Before she did any investing you need a basic understanding of money and how it works. Only then when you are armed with knowledge and confidence should you take the leap. You also cannot wait too long.
Jessica was in her early 60’s when I met her. But she could still live to be 90 and she was still working. She needed to start putting money into her 401k immediately to take advantage of compounding interest and tax advantages. She was making over $100,000. She most likely would move to a lower tax bracket if she maxed out her 401k and took advantage of the standard deduction.
If your young you probably have a low salary. Putting money into your savings can seem frustrating, when it could be used for a better lifestyle. But that is exactly what you need to do. Start with the matching your company offers.
I actually think of my 401k as a savings account. Yes it will increase and decrease with the market. But as you add more and more money your balance will grow and you will earn dividends.
Establish your initial contribution rate and slowly increase how much you contribute as your get raises. It is important that you max out your account as early as possibly because you only get to put in so much money due to the tax deferred nature of the account.
How much you contribute today determines your income in retirement.
Your going to need as much as possible in retirement. Health costs are already high and will continue to rise with the cost of living. An HSA is another tax advantage account and can help build up a nest egg for any health care expenses.
Having a fully funded 401k provides mental security. If really get desperate you can withdraw the money with a penalty.
Another option is to borrow against the amount in the account.
It is never too early or late to be invested in the market.
If your employer offers a ROTH 401k do it!
The ROTH option allows individuals put money in their account after paying taxes. But then the gains in the account are tax free.
You can withdraw money from the ROTH account after 5 years rather than withdrawing at 59 1/2 with the traditional 401k.
Whichever type of account your employer provides you should be investing into it.
You should also be maxing out your ROTH IRA as well. There is a $6000 max you put in this account after tax. You have to set this account up yourself. You do not go through your company.
A great idea is to have both a traditional 401k that has pre-tax money and then a ROTH IRA which has after-tax money. So when it comes time to retire can take full advantage of your withdrawals and pay as little tax as possible.
Once you have your accounts set up then work on becoming the best employee possible. Or becoming the best business owner possible.
The amount of income will make all the difference in your quality of life. Money does not make you happy, but it makes life a whole lot easier.
If you start early and consistently invest you will have so much money you will be able to give money away.
Rmember that you will also get social security. So in retirement you have multiple streams of income as well as an HSA account with plenty of money for health care.
The lesson is simple: Max out your 401k account as wuickly as possible.