Don’t Have a 401k: Why You Should Get One Now

There is great concern about the Social Security Administration’s ability to continue to pay retirees in the future.  In the past, Americans relied mostly on Social Security and pension plans to survive the golden years of retirement. As the economy started to spiral downwards, so did these forms of retirement revenue. Due to poor money management which is out of their control, many hardworking Americans are seeing their pensions shrink or disappear before their eyes.  If you are only counting on your pension and Social Security to survive retirement, you are making a costly mistake.  If you do not already have a 401(k) plan setup, get the process started now.

Most Americans are slightly familiar with 401(k) plans.  They are retirement plans.  For most, they are a backup plan.  Others are counting on their 401(k) as a major source of income during retirement.  These plans are funded by employee payroll deductions.  The money is then invested in mutual funds.  Popular investments include stocks and bonds.

Right about now, you may be questioning the safety of starting a 401(k) plan.  After all, the stock market took a huge dive in 2008.  Those with investments saw their retirement plans decrease and fast.  This has caused a panic.  Some Americans are now holding off on retirement, as they cannot survive their retirement years financially.  Others are wondering if they should move around funds.  A lot of panic has ensued.  Is it really the best time for you to start investing?  In most cases, yes!

Right now, the stock market is at a low.  Financial and investing experts are claiming it can’t get much worse than this.  They are advising investors to stick it out.  Many have the view of “the market can only improve.”  Yes, this may take years.  This is however, where you are at an advantage.  If you have yet to consider a 401(k) plan, you are likely young.  You may be in your early 20s or 30s.  What does this mean?  You can play the waiting game.  You can buy stocks for cheap and wait.  Remember, most financial experts are saying they will only improve.  Since it will be at least 25 years until you retire, you can survive the market’s ups and downs.

If it wasn’t enough that you can invest money in stocks now, for some of the cheapest prices ever, there are many more benefits to having a 401(k) retirement plan.  One of those benefits is the tax advantages.  As previously stated, 401(k) plans are funded by employee payroll deductions.  By automatically deducting this money from your checks, you are less likely to miss it.  Moreover, your contributions are not taxable.  For example, if you earn $50,000 and contribute $2,000 for one year, your taxable income for that year is only $48,000.  The only downside is that the taxman eventually gets his hands on your money; it is taxed when used for retirement.

Another benefit of creating a 401(k) plan is employer contributions.  Most employers have plans in place that allow them to match employee contributions.  This varies greatly depending on the company in question.  Many have restrictions on the matching allowed.  For example, a new employee may get a 25% match.  Some companies will match contributions 100% or more.  Before creating a 401(k) plan, it is advised that you speak with your employer.  See if they match your contributions and by how much.  Look at this as free money.

Finally, there is the flexibility of 401(k) plans.  As previously stated, most employees opt to invest in stocks and bonds.  The decision is yours to make.  You are in control of your money.  Most financial experts recommend that older individuals opt for low-risk investments, like short-term bonds.  These individuals can suffer damaging consequences from risky investments, like the stock market.  On the other hand, those young in life are often encouraged to take a gamble.  It will usually pay off and may result in long-term wealth.

As you can see, there are a number of benefits to creating a 401(k) retirement plan and profiting from the current state of the stock market.  Now is the time to purchase low-cost stocks.  Sit back and wait as they survive the struggling economy.  If you play your cards right, your 401(k) will not just supplement your pension and social security, but it could finance your retirement years on its own.

Author: Dr. James Hans

Dr. James Hans is a personal finance expert, who has dedicated his life to providing financial education in the areas of personal finance and investing.

Leave a Reply