Updated on 02.27.12

Open Up a 401(k) or 403(b) Now (57/365)

Trent Hamm

This tip is directed at everyone who has a job where a 401(k)/403(b)/other individual retirement savings plan is available, but you’ve not yet signed up for it out of laziness, forgetfulness, or some other non-retirement-based reason. This tip is doubly directed at everyone whose employer offers matching money for that retirement plan and they’re not signed up for it.

Open that account now.

Open Up a 401(k) or 403(b) Now (57/365)

Let’s be realistic here. If you’re under the age of about 50 or so, you’re playing a fairly dangerous game in assuming that Social Security in anything close to its current form will be there for you when you hit retirement age. Most likely, the money will be a pittance and not nearly enough to survive on. There’s some chance that there will be nothing at all.

Don’t rely on that pension, either. Companies go under – even governments go under. Many look for ways to get out from under the financial burden of paying out that pension they’ve promised to their employees, and many get away with it.

The only retirement tool I believe in is one’s own savings for retirement, and that’s where a 401(k) (or similar plan) comes in.

For most people, a 401(k) is the absolute easiest way to get started saving for retirement. In many workplaces, you just fill out a form, they take a little money out of each of your paychecks, and you’re saving for retirement. Not only that, the money taken out of your checks isn’t very painful at all. If they take out $20, it likely only drops your take-home pay by $16 or so because the money is taken out before taxes are calculated.

Even more importantly, some employers offer free money into your 401(k) if you put money in yourself. Let’s say your employer offers a one-for-one match. If you sign up to put in $20 per paycheck, your paycheck only goes down $16, you put $20 into your account and your employer puts $20 into your account. That’s free money, and if you’re not signed up for it, you’re saying no to that free cash.

Some people stress out about the investment choices. Don’t. Even if you make a really poor choice among the investment plans offered, you’re still far better off putting money in there than you are not putting anything in at all. Saving money in a terrible investment is much better than saving nothing. You’re better off just picking a plan at random than you are putting it off another paycheck.

That’s not to say you shouldn’t look at the investments and try to figure out the best one. The thing is, you can do that later. You can change investments later on without much difficulty at all if you decide you’d rather be in something else. The only difference is that if you start saving for retirement now, you’ll actually have money in there to move.

Of all of the financial mistakes I made in my early life, the one I didn’t make was putting money away for retirement. I saw the challenges my parents were having as they neared retirement and I didn’t want to have that kind of difficulty. I put in quite a lot, and I’ve never really stopped.

Looking back on it, I realize that I would have had bigger paychecks had I not put that money away, but I know full well that if I had bigger paychecks back then, I would have just spent the money on things I didn’t need.

You won’t miss the small amount that’s gone from every paycheck, but a few decades down the road, you certainly will miss not having hundreds of thousands of dollars in retirement saved if you don’t make this move today. Just do it.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Todd says:

    If governments can go under, banks can certainly go under too. (Though apparently only AFTER the governments have failed.)

  2. Becky says:

    This is the one personal finance task that my mom and dad harped on after I finished school. I am so glad they did. My first job did not offer a 401(k), and they actually set up an IRA for me and “matched” my contributions 50% (thanks, Mom and Dad!) It wasn’t much money (I think I saved $1,000 total) but the fact that they were willing to spend their own money to encourage me made a big impression.

    Since I started contributing to retirment accounts from the very beginning of my career, I never missed the money. I got used to living on a lower income, which means the money I am saving will go further, too.

  3. kc says:

    Tomorrow’s photo is a stunner.

  4. krantcents says:

    The best part of a 401K is it is pretax. It as though the IRS is subsidizing it.

  5. Tom says:

    The best part of a 401K is it is pretax. It as though the IRS is subsidizing it.

    They do, considering the possibility that you may eventually be paying ordinary income tax rates on money that could have been taxed at the more advantageous (to the individual) long-term capital gains rates.

  6. Steve says:

    “They do, considering the possibility that you may eventually be paying ordinary income tax rates on money that could have been taxed at the more advantageous (to the individual) long-term capital gains rates.”

    You have a misunderstanding of the math. Because of the commutativity of multiplication, if you have the same income tax rate now and in the future, then the income taxes end up being equal, and then the long term capital gains taxes come out of the taxable account, leaving you with less money in the end.

    Currently in the 25% bracket. Investing $1000. Earn 10% for 30 years.

    If you invest in a deferred account, you put the full $1000 in. It grows to $17,449. You withdraw it and pay 25% taxes in the future, leaving you with $13,087 to spend.

    If you invest in a taxable account, you pay $250 in taxes now, and put the remaining $750 in your investment account. It grows to $13087. However, you owe long term capital gains taxes on the growth of $12,087. At a 15% tax rate, you pay $1,813 in taxes.

    The only way a taxable account can beat a tax-deferred one in such a comparison is if the future income tax goes up significantly. Even if the capital gains rate goes down to zero, that just brings the taxable account break even with the tax deferred account.

    There are reasons to invest outside tax-deferred accounts, but long term capital gains rates currently being lower than income tax rates is not such a reason.

  7. Tom says:

    There is potential though, that you earn some ridiculous amount of money that’s only taxed at 15% rather 25%+, and at some point, after hitting your personal exemption, it makes more sense tax-wise to withdraw money from a taxable account rather than a pre-tax account.

    See Romney, Mitt.

    (Note, not saying there’s anything wrong with that, or that this situation is exceedingly likely for all of us. Just a thought.)

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