The sooner you start putting money into a 401(k), the better. If you are in your 20s or 30s, retirement may be low on your list of financial priorities. But if you start investing in your 401(k) now, your savings could grow tax-free for the next 30 to 40 years. Also, if your employer is offering matching funds and you fail to either opt into your 401(k) or contribute the maximum your employer will match, you are, in effect, turning down free money.
Living longer is more likely in the 21st Century. When you reach your 60s or 70s, you may want to relax and enjoy life. Participating in an employer-sponsored 401(k) plan is one of the best ways to start stocking money away for the future. It can help you ensure that you don’t run out of money while your retirement is still in progress.
Tax Savings With 401(k) Contributions
Another thing to consider is, the more you invest in your 401(k), the less you pay in annual income taxes. 401(k) contributions are not included in your gross taxable income. By reducing your taxable income amount, you reduce the amount of state and federal income taxes you pay.
Greater 401(k) Investment Return Potential When You Start Early
When you start contributing to a 401(k) in your 20s or 30s, you have more time to save for retirement, so you can afford to take more risks. This opens the door to the possibility of greater returns. Try to distribute your 401(k) investment 80/20 between stocks (more lucrative, but volatile) and bonds (stable, with a lower return rate).
Get The Most From 401(k) Contributions In Your 20s & 30s
Investing in a 401(k) beginning in your 20s or 30s gives you time to implement an investment strategy geared to produce better returns. To get the most out of a 401(k) beginning in your 20s or 30s:
- Always contribute the maximum your employer will match. (To do otherwise is like turning down free money.)
- Make sure you invest in plenty of stocks for higher average annual returns.
- Don’t lean too heavily on a discounted employee stock purchase plan (no more than 10% of your portfolio).
- Increase your 401(k) contributions regularly. (When you get a raise, give your 401(k) a raise.)
If you have questions about 401(k) contributions, our friendly agents are happy to help.