Saturday, October 27, 2012

should I invest in my company's 401(k) plan?

Not sure? Let me rephrase the question. Should I give myself a raise? Does that help? If not, go schedule yourself for a check-up.

Who doesn't want a raise? If you're a little confused as to what your companies 401(k) plan has to do with you getting a raise, you should find out what your company's 401(k) plan is. When you sign up for your company's 401(k) plan, you choose a percentage of your income that you want your company to put away into your retirement savings to build up your nest egg. The money you put away will not be taxed until you start pulling it out after retirement. The company will usually match your contribution 100% up to a certain percent of your income. For example, if your income is $50,000 a year and your company is offering to match your contributions up to 5%, you can choose to contribute 5% ($2,500) and your company will throw another $2,500 into your retirement. You just gave yourself a 5% raise. However, if you choose to contribute 8% ($4,000), your company will only match the first 5% ($2,500).

Let's create a scenario. Let's imagine you are currently 30-years-old and have no nest egg (retirement savings) at all with a $50k salary and your company matches your contributions 100% up to 5%. If you start investing in your company's 401(k) retirement plan now with 5% of your income, when you retire at age 65 you will have:

$633,217 at retirement!


image from http://www.401kcalculator.org/
And that is using conservative numbers, assuming you only have a 1% increase in salary per year and you only get a 6% return on your plan. That is also coming from having absolutely no retirement savings.

If you are about to graduate from college and get your first full-time salary job, this is the perfect time to take advantage of your company's 401(k) plan. You are used to living with your part-time hourly job and you suddenly increase your annual income quite a bit. Invest in the plan immediately and get in the habit of making contributions. You will still be receiving more than you are accustomed to in your monthly paycheck. There are a lot of companies out there that have great 401(k) retirement plans. Just check out this list of top 5 employers with generous 401(k) matches on money.usnews.com. Just for fun, let's create another scenario with Clif Bar.

image from http://www.401kcalculator.org/
You just graduated from your university at age 24 and received a great offer with Clif Bar for $45k a year. They are offering to match your 401(k) contribution 100% up to 5%, but you decide to go ahead and contribute 8% because you want to retire well. They also promise you at least a 2% increase in your salary every year. If you receive an 8% return with your company's plan, you can retire at age 65 with:

$2,109,362 at retirement!


Tell me, how awesome is that? Now go give yourself a raise.

2 comments:

  1. Your graph is misleading. You've compared annual contributions with a cumulative balance. You should be comparing the cumulative contribution with the cumulative balance.

    ReplyDelete
    Replies
    1. I suppose that is just how 401calculator.org chose to represent the information. I think it's more of a preference. Would you be willing to share any sites that will compare cumulative contribution with the cumulative balance?

      Delete