Finally, you're working at a company with a decent benefits plan. But you have just realized that, in order to take advantage of the 401(k) perk, you're going to end up bringing home less money every paycheck. I'm going to show you how a short-term sacrifice will result in long-term gains -- without having to work for it!
Simply put, a 401(k) is an employer-sponsored retirement plan. It gives you an opportunity to put a portion of your paycheck into a retirement account before you spend it and, generally, before Uncle Sam taxes it.
There are three big advantages to a 401(k).
It's an easy way to save. The money comes out of your paycheck before you can get your hands on it.
Your money gets invested and accumulates over time. This happens because of regular contributions that are deducted right from your paycheck.
Many companies offer a matching contribution, which to you means free money! Check out the two savings calculators below to figure out how much your own investment will drive your employer's contribution.
Even if your company has a vesting schedule (meaning the company match becomes yours in increments of, say, 20 percent a year until you're fully vested in five years), don't worry. Even if you leave before you are fully vested, you still walk away with something, and it's free!
Insider tip:
Contributing early has a significant impact on how much you save. For example: If you contribute $5,000 to a 401(k) every year for a 10-year period beginning at age 25 and then stop and never contribute again, you will still end up with more money than someone who waits until he or she is 35 and starts contributing the same amount in a 401(k) every year until retirement.
How? Well, starting early puts time on your side. Your money has more momentum and longer to grow, and it compounds. This means your investment earnings generate earnings themselves.
401(k)s: In the long-run, you just can't beat this short-term plan.