Saving for retirement can be a daunting and faraway concept for a young professional. We’re all navigating through busy lives and have more immediate obligations to tend to. Still, it’s important to save early so we can take advantage of compound interest. A 401(k) can help you tuck some away cash so it can grow while you work your way to retirement. Here’s what you really need to know.
What is a 401(k)?
A 401(k) is a popular retirement plan that your employer sets up for you. Once you decide how much you want to contribute, your employer will automatically deduct it from your paycheck each month.
1. A 401(k) comes with tax benefits.
When you contribute cash, you don’t have to pay taxes on that income until you withdraw it in retirement.
2. Your employer will match a portion of your 401(k) contributions.
A key part of your compensation package is a retirement plan match. This means your employer will match your 401(k) savings, dollar for dollar, up to a certain amount (it usually falls between 3% and 5% of your salary). Here’s the major takeaway: contribute at least as much as your employer will match so you don’t leave any money on the table.
3. You can invest your retirement savings.
Each retirment plan offers a package of investment options. It’s a good idea to invest your 401(k) savings in a long-term plan. That’s because you can earn a higher return than if your savings sit in cash for years and years. Keep in mind that your age and risk profile should dictate how much you invest in riskier assets (like stocks) and safer assets (like bonds). As a young person with many years before retirement, you have time to withstand market fluctuations and can therefore take a riskier approach. As you get older, you’ll want to shift some of those assets into safer bets.
The federal government limits how much you can contribute to a 401(k) in any given year. For 2018, that amount is $18,500. It’s also important to note that you cannot withdraw from your 401(k) without a penalty before age 59 ½. That’s why it’s important to find the right balance between retirement savings and savings you can access today.