The Key to Your 401(k) - Start Today!

Add comment February 22nd, 2008

 Jessica L. Knudsen, CFP®

For young people entering the workforce, retirement may seem like a long way off.  But the best thing that you can do is start saving as soon as possible.  One of the best ways to start saving is through your company’s 401(k) plan.  According to msn.com, if you saved $4,000 per year to your 401(k) starting at age 25, you would accumulate approximately $1,000,000 by age 65 assuming 8% average returns.  If you waited to age 35 to start saving, the balance of your 401(k) at age 65 would only be $453,000!   

A great motto is to “pay yourself first.”  The savings to your 401(k) is taken right out of your paycheck so you don’t really see it coming out of your pocketbook.  It won’t take long before you don’t even realize you are missing that amount out of your monthly budget. 

A good savings target is 10% of your pay.  If this amount seems too high at first, start with contributions to at least get your full company match.  This way you are not leaving any free money on the table.  As you get pay raises, increase your contribution amounts.

The Roth 401(k) option is a great new feature, especially for younger workers.  The Roth 401(k) allows you to contribute after-tax money to the plan while the account grows tax-free.  This is perfect if you are in a lower tax bracket now than you will be when you withdraw money from the account in retirement.