Your grandparents—and even some of your parents—had it pretty easy when it came to saving for retirement. Back then, not only was Social Security a reliable source of retirement income but many employers offered Mom or Dad a defined benefit pension plan as well.
It was a nice company perk, primarily funded by the employer, which promised to pay retirees a steady “paycheck” for the rest of their lives.
Today, about half of Generation X and Millennials believe they will receive no Social Security benefits by the time they retire, according to a Pew Research Center survey. In addition, less than one in five companies continue to offer employer-funded pension plans. Instead, employers are more likely to offer 401(k) plans as a way to help employees save money for the future. Some companies may offer auto-enrollment — meaning you have to opt out if you don’t want to participate. Others may require you to proactively sign up for the plan.
Either way, your mission is clear: Participate in your employer’s 401(k) plan as soon as your company allows—and stay the course. Your future comfort and security rests almost solely on your ability to save during your working years.
You Are In Charge
Conventional wisdom says you should aim to replace 65% to 90% of your current income to maintain your lifestyle once you retire. For example, if you make $50,000 per year today, you may need anywhere from $32,500 to $45,000 (in today’s dollars) to make ends meet in retirement. Keep in mind that Social Security may not be enough, as it may only replace about 40% of your current income.
To augment your Social Security benefits, there is no getting around saving aggressively throughout your working years. That’s where your 401(k) comes into play. It allows you to invest for your future, while taking advantage of the income tax savings, employer match and long-term compounded growth of your wealth.
Let’s take a look at all three of these important benefits.
Whatever you do, avoid touching your 401(k) money before you reach retirement age unless you are facing an extreme emergency. Not only will you dampen your chances of having a comfortable retirement, you’ll have to pay some hefty penalties and taxes as well. If you change jobs, either keep the money in your current 401(k), roll it over into your new one or roll it over into an IRA.
Beware of the Cash Trap
Despite these hard-to-pass-up benefits of 401(k) plans, some workers—especially women—tend to fear investing of any sort, often because they lack confidence in their investment know-how. If you decide to “play it safe” and keep your money in savings accounts, money market accounts and certificates of deposit (CDs), you may miss out on the significant capital appreciation historically provided by stocks and bonds.
While short-term investments play an important role in your overall financial strategy, they aren’t designed to grow your wealth over time. Your money likely won’t keep up with inflation when it is sitting in cash. By recognizing and overcoming your financial insecurity, you can avoid the common money pitfall of investing too conservatively.
One Final Note
If you can afford to “max out” your 401(k) contributions, do it. The maximum amount you can put into a 401(k) in 2019 is $19,000. If you are age 50 or older, you can contribute an additional $6,000. With time on your side, the “freebie” employer match and tax benefits, investing in your 401(k) matters a lot. You don’t want to miss out on your chance to get that steady paycheck in your retirement years—just like your grandparents.
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