Many employers offer 401k benefits to their employees to incentivize saving. Investing in your 401k is an excellent way to prepare for your retirement, but there are lots of reasons financial advisors say you should start contributing now:
1. It’s A Great Way to Diversify Your Investment Portfolio
As much as most of us would like to invest in the stock market, we cannot do so due to time and cost constraints. If you are a professional in your field, your time is always occupied by a client or a project. You barely have enough time to sit down and analyze the stock market. Alternatively, you could hire a mutual fund manager to do the trades for you, but that would come at a cost – the minimum investment amount for most funds is $500. Contributing to your employer’s 401K is free, and you are guaranteed a payoff if you decide to quit your job or retire.
2. You Earn Free Cash With An Employer Match
Here, your employer matches your contribution and adds a similar amount to your 401K. In the end, you find yourself with more money than you had expected in your 401 accounts. For example, if you contribute $50 to your 401K, your employer can decide to match it with a similar $50 deposit. The good news is that 70% of all employers have a matching program.
3. It Makes Saving Easy
If you accept your employer’s 401K plan, a certain percentage of your salary is automatically deducted and sent to the account every time you receive your paycheck. As a result, you no longer have to worry about contributing to your savings account.
4. Tax Breaks
A 401K plan gives you two tax breaks. The first one happens after you receive your income. Since the 401 amount is automatically deducted, you pay fewer taxes on your final earnings. The second tax break is your 401K savings account. This amount is not taxable because the earnings are rolled back in the plan.
5.Your Money Grows Fast
Since the amount in your 401 accounts is not taxed, it grows much faster than other saving accounts. Apart from the tax breaks on your 401K savings, your interest is compounded. This means that the interest is calculated according to the rolled back amount. Depending on the rate, your money can double within seven years or more.
6. Flexible
If you decide to quit your current job, you can roll over the 401K amount to your retirement account to avoid paying withdrawal taxes. This option allows you to rest easy knowing that the decision to quit your job won’t affect your plans. It also gets rid of any uncertainty you might have about your 401K plan with your current employer.
7. It Allows You to Enjoy Your Retirement
Your social security savings can only allow you to afford the basic commodities at most. Although the amount can help you survive in your old age, it doesn’t allow you to live comfortably. A 401K creates an additional source of income for your retirement needs.