Instituting a strong, disciplined approach at an early age is the most important aspect of building a healthy 401K account.
Our life cycle can easily be broken into three distinct seasons. The first season of life is childhood and adolescence. These early years are when we are dependent on others to meet our needs. The second season is the working years. During this time period, we are self-sufficient and able to meet our own needs. The third season is retirement. Retirement is the season in which we will need to draw from resources that have been put away during the working years.
It seems pretty basic: we are cared for in season one, and we care for ourselves in seasons two and three. Although many people survive the first two seasons with few financial crises, the final season is often a difficult and stressful time financially due to a lack of planning. What can we do to avoid this difficult and trying time in our retirement years? The answer is having a well-developed savings plan and implementing it at the outset of the working era. There are many vehicles that can be used to accomplish a well-balanced savings program, but I would like to focus our attention on the benefits of utilizing the 401K plan offered by employers.
It is amazing that as a young child time seemed to stand still, but as we grow older time seems to pass by before we notice it is gone. Time is a commodity that once passed cannot be retrieved. For this very reason, we should discipline ourselves to take advantage of 401K plans at the earliest opportunity.
According to a 2011 Retirement Confidence Survey, workers surveyed stated that they are a lot (40%) or a little (30%) behind schedule in their savings plans for retirement. In addition, the Employee Benefit Research Institute reported that 43% of workers have less than $10,000 in savings. Both of these surveys clearly point out that the average worker is not properly prepared for retirement. Perhaps some have lost sight of how to save because they feel they cannot afford to participate in a 401K program. Discipline is the most important key to a successful savings plan. Instituting a strong, disciplined approach at an early age is the most important aspect of building a healthy 401K account. Indeed the saying is true, you will either, “spend your life working for money or spend your life having money work for you.”
Now that we have determined that we need to exercise discipline in our savings approach, why should a 401K program be used as a primary vehicle for retirement savings? The financial reasons can be quite compelling.
- First, many companies offer to match their employees contributions to a predetermined percentage or amount. In other words, your employer is actually paying you to save.
- Second, it can save on your taxes. The IRS allows deductions to income for contributions up to $17,000 in 2012. In addition, persons age 50 or above are allowed to make “catch-up” contributions up to $5,500 in 2012.
- Third, it is very easy to contribute to your 401K. Automatic payroll deductions make it very easy to direct money into your 401K account on a regular basis.
- Fourth, it is difficult to withdraw funds. Although emergencies do occur and there are procedures for these circumstances, it is not easy to withdraw funds on an as needed basis.
The purpose of this article is not to give advice regarding where to invest 401K funds but rather to simply encourage investing in a 401K. I have purposely remained quiet on this topic. The issue is not where you invest, but that you do invest. Keep in mind that it is a discipline, and the sooner you exercise that discipline the better off you will be.