This post is for all of the soon to be college graduates and those who are starting a new job. On your first day at your new job you'll spend time filling out all sorts of paperwork. The most important one is probably your W-4, which your employer needs to pay you. The second most important? Some people might say your insurance forms, I'll go with signing up for your company 401k.
You can contribute up to $16,500 per year to your company 401k. Most employers also match your contributions to some degree. The average company contributes $0.50 for every $1.00 you contribute up to 6% of your income. Simply said, they're giving you a tax deferred (you don't pay taxes on it until retirement) 3% raise. Most financial advisors call the company match "Free Money".
Free money is one of the biggest reasons to sign up for your 401k on your first day on the job. Another big reason is that the earlier you save, the easier building wealth becomes.
Someone who contributes $2,000 per year to their 401k from 20-30 then leaves it alone to grow until they're 60 will have nearly $291,000 to help fund retirement. This person will only have saved $20,000 of their own money. All of the rest of the wealth will have grown from an 8-percent annual growth rate.
Someone who waits until they turn 30 to start saving can still save the same $291,000. However, they have to save a lot more and a lot longer. The 30 year old will have to save $2,600 per year from 30 to 60 at an 8-percent growth rate. The person who waited will have to save a total of $78,000. They'll still get most of their money from compound interest, but it'll be a lot more work.
All of you college graduates, start now. If you think you can save $5,000 per year, stretch to $6,000. If your employer is matching another $1,500 you'll have $7,500 per year going into your retirement plan. Using the same 8-percent return and saving that same $7,500 for 30 years, you'll have $850,000. Now we're building wealth!
If your employer has a 401k with a match, go sign up. Stop reading this post right now to go sign up. You'll start building wealth today!
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What's a good strategy for deciding which funds to put 401K money into? I've usually just picked 2 or 3 funds that have a good track record and seem to be balanced.
ReplyDeleteHow often should someone reevaluate the distribution of their 401K money? If I'm putting some money into a fund that has been a dog for a year or more, should I change it up or hang in there?