Why participate in a 401k? If your employer offers a 401k, take advantage of it! 401k plans are one of the best and easiest ways for normal everyday people to get rich! Putting it bluntly, if you are not taking advantage of your employer’s 401k plan, you are stupid! Let me rephrase that…if you are not taking advantage of your 401k, you are a complete and total moron.
How safe is a 401k plan? They are as safe as the investments you make within them. If you invest 100% in your company stock (a bad thing to do BTW, just ask the nron people), and the stock drops like a rock, so does your 401k plan. If you invest in diversified solid investments, you will be in great shape!
Why are 401k plans so great? First, you are putting the money in the 401k plan, before you ever see it!. And it goes in there automatcially. If you have it in your wallet or bank account, there is a good chance that it will get spent. But by investing it before you ever see it, you will likely never even miss it.
Next, money goes intp the 401k plans pre-tax! This is like the government loaning money to invest! Why is the pre-tax part of a 401k so cool? Take a portion of your earnings, say $100. If you were the get it as part of your paycheck, and went out to spend it, you might only have $75 left of the $100. But Rob, where did that other $25 go? Well, Uncle Sam took for taxes! Ouch! But, if you took that $100 and stuck it into a 401k plan, it would all go in there. Uncle Sam will eventualy want his $25, but for now, you are free to invest the $25, and keep reinvesting all the interest that the $25 is earning. But how much interest can $25 make? Well at 10%, the $25 would grow to almost $65 after 10 years. But we are not just talking about one $25, abut about lot’s of $25 throughout the year.
If your employer has matching it gets even better! My employer matches half up to 6%. Many employers offer this. Some even match 100%. Lets take the half up to 6% that is pretty common. For that original $100, the employer would match another $50. So $100 of your pre-tax dollars would go into the 401k plan, plus another $50 from your employer. So you would now have $150 in your 401k plan. Compare this to the $75 you would have in your pocket. You doubled your money without even trying! Now how much would that $100 grow to in 10 years? At 10%, about $390. So you could have $75 of junk that probably don’t really need, or you could be investing in your future!
Keep in mind that your employer matches your 401k funds to encourage you to stay there. The money they match is not actually yours right away. They have a 401k vesting period. So after maybe a year, 25% of the money will be yours. Then after another year, half the money will be vested. Each company decides their own 401k vesting period. But by law, the full amount must be vested within 7 years.
Personally, I am trying to put the maximum into my 401k plan! The maximum this year is $15,000. That $15,000 doesn’t even include my employer’s matching. How much will that $15,000 grow to in 10 years at 10%? About $39,000. After 20 years at 10% returns, it would grow to over $100,000! But I have been investing for a bunch of years now. And my funds have actually been doing better than 10%. My 401k plan is currently worth about $250,000. Thats a quarter million dollars!
Do I have any regrets? I wish I had been putting more into my 401k plan earlier! Who knows where my 401k balance would be now.
So sign up for your 401k plan now! If you already have one, increase your 401k contributions! Max that sucker out!