Five Minute Finances is a series of tips on how you can save significant money or reorganize your financial life in just five minutes. These tips appear Monday, Wednesday, and Friday on The Simple Dollar.
If you haven’t started up a 401(k) plan (if you’re an employee) yet, what are you waiting for?
Let’s say you make $40K a year and you’re twenty five years old, meaning you’ll retire sometime around the age of sixty five. Even if you just contribute 1% of your salary – less than $10 a week (and it’s employee matched) into your 401(k), it returns an average of 8% a year, and you only get a 4% raise a year, do you know how much you’ll have at age sixty five? $369,388. If you make that donation just 2.5% – still less than $20 a week before taxes, meaning only about $15 a week out of your take-home – and get the employee match, you’ll have $923,471 in your retirement account at age 65, just shy of a million bucks. In short, a 401(k) plan can add up to huge amounts of money – and it doesn’t cost very much, either.
Even more impressive is the fact that most companies offer a match for every dollar you put in. Quite often, this can go as high as 5% of your paycheck that they’ll simply give you if you put it into your retirement account. All you have to do is invest.
I don’t know anything about investments! Don’t worry about it. Put it all in a target retirement fund (something almost all 401(k) plans offer) and let them do all of the investment managing for you.
But what about the folks who got ripped off by Enron? Since that debacle, retirement plans have had new rules introduced that protect you from such a catastrophe – they’re not allowed to invest all (or even most) of your retirement plan into the company’s stock. In other words, even if your organization collapses, your money won’t just disappear.
Make the phone call right now to your organization’s human resource office and ask to start up a 401(k) plan, even if you know nothing about investing. Tell the person you just want all of it in a target retirement fund, which means someone else manages the whole thing for you based on when you’re expecting to retire. I’d recommend putting in as much as your company matches for starters, but as you can see, even a couple of percentage points isn’t bad.