Explaining the Benefits of a 401(k) to Young Adults Entering the Workforce

As a new college graduate or someone already employed, it's crucial to take advantage of the opportunity to open a 401(k) through your employer. Many employers offer matching contributions, which means they will match a portion of the money you contribute to your 401(k), up to a certain percentage of your salary. This is essentially free money that can significantly boost your retirement savings. Starting early allows you to maximize these contributions and the compound interest that accrues over time.

Understanding the value of saving early is key to setting yourself up for long-term success. Here are some key advantages of starting to contribute to a 401(k) in your early 20s. 

Retirement Plans Offer Tax Breaks  

One of the most important reasons to start participating in a retirement plan early is the tax breaks that come with it. Surely, every young person remembers the feeling of getting their first pay stub and seeing a large percentage of their pay taken out for taxes. By participating in a 401(k), you can save money before those taxes are taken out.

The money you put away now has growth potential due to compound interest and will not be taxed until you begin taking distributions from your account during retirement. 

Potential Employer Contributions 

Another incentive for participating in a 401(k) at a young age is employer contributions. Every employer is different, but many will offer some type of matching contribution for those who choose to participate in their sponsored retirement plan. Employer contributions are essentially “free money” for your retirement savings.

Say your employer will match contributions one-to-one for up to 4% of your paycheck—anything you contribute up to 4% will be doubled. In this scenario, you should aim to contribute at least 4% of your paycheck in order to take full advantage of what many people consider to be “free money.”

Automatic Contributions 

Not only is opening a 401(k) a smart idea, it’s also very easy to contribute to one. Contributions are taken from your paycheck pre-tax and deposited directly into your retirement account. If you start saving early on, you probably won’t even notice a difference in your take-home pay. Most 401(k) plans also make it easy to automatically increase contribution rates each year—something that many financial professionals suggest to effectively compound retirement savings. 

Comfort in Retirement 

Lastly, the earlier you start to save, the more likely you'll be able to comfortably retire when you get older. Compound interest builds over time, so the longer your account is open, the greater the potential for substantial growth. And starting now will allow you to build a good habit of saving a little bit every month. Even if you stop contributing because of unemployment or financial strain, the money you’ve already contributed has the ability to continue to grow. 

Alternative Options for Retirement Plans 

If your employer doesn’t offer a sponsored 401(k) plan, you should consider an IRA plan instead. IRA plans offer similar benefits to traditional 401(k)s—they gain interest over time, can take automatic contributions from paychecks, and involve tax benefits. You can choose from a traditional IRA, which is tax-deductible, or a Roth IRA, which is not tax-deductible but has the benefit of non-taxable distributions during retirement.

Since these are independent plans, you can keep them open even if you start a new job that offers a 401(k). Many financial professionals even recommend keeping retirement savings in more than one type of account.

Whatever career path you choose, saving for retirement is an important step in your adult life.

If you have any challenges or want professional advice on retirement planning, schedule a meeting with us today. We're here to help you navigate your retirement planning journey and ensure you're on the right track for a secure financial future. 

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.