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What Is A 401(k) And Do You Need It?

Wondering whether you need a 401(k) but are uncertain about whether or how you should participate in the same? Quite a few people are facing the same dilemma and you would not be different in thinking similarly because the task can be daunting for most.

A 401(k) is an investment plan that will prove extremely beneficial for your retirement and regardless of whether you like it or not you are advised to set aside money for the 401(k) plan offered by your employer. When your employer offers you a 401(k) plan you should be happy to accept the same because you are getting an opportunity to begin saving for your retirement and the most important part of the contribution to the 401(k) plan is coming from your employer. What should you be doing if your employer is offering a 401(k) plan?

A well-designed 401(k) plan is an enormous competitive edge when recruiting and retaining employees. Barry Ritholtz

Just begin investing at the earliest

If your employer is offering a 401(k) just sign up and begin putting away a percentage of your paycheck into the account. Your contributions to the 401(k) are tax-free and as the fund is made up of pretax dollars you are only liable to pay taxes when you withdraw the money during your retirement. Begin making your contributions to the fund at the earliest because your 401(k) account will be worth a significant sum of money in 25 or 35 years. Don’t spend a considerable amount of time thinking about it and begin saving money even if it is a small amount.

Try to match your employer’s contribution to the 401(k)

You are forgoing an opportunity to get some free money if you decide not to take advantage of your employer’s contribution and match it equally with a contribution of your own. Your employer will often contribute a certain percentage of the money you dedicate to the 401(k). This is free money and therefore you should be contributing an amount that can match the 401(k) contribution of your employer.

Aim to save about 15% of your income

Experts have provided advice that people should put away 15% of their income for their retirement and this amount includes the company contribution. By the time people are about 30 years old they should have at least a years salary worth saved in the 401(k).

People are required to think about the long-term and should plan to have enough money in the 401(k) and therefore they should be aiming for having at least 70 to 80% of their income during their retirement. Of course, they may have to make certain adjustments depending on the kind of lifestyle they have chosen for themselves. However maximizing the savings will not harm their plans but only make it possible for them to lead better lives as retired employees.

Never tap into the 401(k) to keep control over your financial life

Financial matters can be extremely stressful during the life of an individual. Things can worsen if people decide to tap into their 401(k) plan early and most financial advisors recommend not doing so because they can face penalties while also diverting funds from their retirement accounts. Financial advisors recommend having an emergency account to cover for 3 to 6 months expenses rather than tapping into the 401(k) because it can prove helpful in the event of a job loss or an unexpected expense.

Automate your savings so that you have money taken directly from each paycheck and deposited into a 401(k) or other workplace retirement account. If that’s not an option, automatically have money transferred out of checking into savings each time you get paid. Jean Chatzky

Do not withdraw your 401(k) even if you change jobs

A job change may encourage you to withdraw the 401(k) you have with your present employer. However, you are advised not to exercise this option because there are several other available to you. You can leave the money in the 401(k) plan offered by your previous employer or consider rolling over the 401(k) to your new employer’s plan or even move it into an IRA [individual retirement account].

A 401(k) plan is just what you need to lead a comfortable life during retirement. There should be no questions about whether you needed or not. It is an essential requirement that you should not be ignoring at any cost.

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