Starting a new job is stressful. You sign up for health insurance, attend orientation and then are left with benefit packages to decipher and a new responsibilities to master. Investing can be scary — and with all the fine print and investment choices — signing up for a 401k account at work might fall by the wayside.
Whether you’re a younger employee, or have been around the block once or twice, it’s easy to put off signing up for your company 401k plan.
But, if you could take a few steps now to learn about and enroll in your 401k plan, you might be hundreds of thousands of dollars richer — or even a millionaire — by participating in this tax-advantaged retirement plan.
The 401k Basics
A 401k is named for the section of the tax code that governs the accounts. It is an investment account sponsored by your employer, allowing you to transfer, pre-tax, a portion of your salary to invest in your future. Many employers also “match” a portion of employees’ contributions. Matching employer contributions is “free money” on top of your salary and benefits.
So, if free money isn’t enough to get you started investing in your 401k, here’s another motivator.
For 2019, the IRS allows individuals to contribute up to $19,000 — up from $18,500 in 2018. Based on this cap, you should deposit at least enough to obtain the “match” from your employer, which is typically 5%-6% of your salary.
Since you contribute money before paying taxes, you’re essentially reducing your taxable income. Further, the 401k investments grow tax-free while in the account.
Here’s an example. Assume that Rebecca, a 30 year old, earns $100,000 annually and starts investing immediately in her 401k account. If she invests $10,000 per year into her account (without increasing the contribution amount), and her employer match is 5%, her employer would contribute $5,000 annually.
In 20 years, when Rebecca is 50, the account will be worth approximately $605,000. In 30 years, at age 60, her account will have grown to $1.3 million, assuming a 7% annualized rate of return.
The Perils of Waiting to Invest
Now let’s compare Rebecca with Raymond. He was distracted and apprehensive about investing in his 401k. Assume that he waited until age 40 to begin contributing. Raymond contributed the same $10,000 annually and his employer also contributed $5,000 each year. In 20 years, at age 60, Raymond has $605,000 in his account. That’s no small feat, but it pales in comparison with 60-year-old Rebecca’s $1.3 million.
Whether you feel scared, overwhelmed or distracted, you can lose hundreds of thousands of dollars by waiting to contribute to your 401k.
Tips to Start Investing in Your 401k Now
If you’re overwhelmed with choosing investments, most retirement accounts offer a target-date fund. These funds divide your money among diversified stocks and bonds and become more conservative as your retirement date approaches. By choosing to invest in a target-date fund, you can avoid having to pick individual investments.
If you already have a 401k, congratulations. To make sure you’re maximizing your 401k returns, get your retirement account analyzed — for free — with this handy platform, Blooom.
Finally, begin investing now, even if you feel worried that you might leave your job soon. Then, when you do leave your job, you can roll your 401k over to an IRA. Your money will then continue to grow until retirement.
It’s difficult to find a wealth-building tool as powerful as a 401k account, so don’t let fear deter you from a golden opportunity.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.