Free money? That’s what a 401(k) match really is. Your employer may offer to match everything you contribute, dollar for dollar. Sadly, 59 million Americans snub this free money every month. Chances are good you’re overlooking that double-your-money opportunity. Nearly 60% of those who are eligible ignore it, imperiling their retirement. Do you?
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Your employer’s 401(k) match is the easiest money you’ll ever find. And the closest thing to a “free lunch.” What’s more, it’s not a government handout. Nor is it the lottery.
Yet millions reject this free money. According to Bloomberg, the U.S. Census Bureau reports that 79% of Americans work for a company that offers a 401(k) retirement plan. Yet only 41% of these people participate.
How tragic! Investing in a 401(k) plan is the #1 brain-dead simplest way to save for your retirement. And it gets even better…
401(k) Match: A Free Handout to Grow Your Wealth
Invest 3% in your 401(k) plan and many employers will match that first 3%. In other words, for every $100 you put into your account, your employer adds another $100. How easy is it to make money when someone doubles it instantly?
That’s like doubling your money – while hardly lifting a finger! Where else could you ever hope to get that kind of return? If you’re part of the 79% majority whose employers offer a program with a matching 3% (some match even more), at least contribute the amount they match. At the same time, you sock away pre-tax money to save for your retirement and a financially free future, with your 401(k).
401(k) Match Instantly Doubles Your Money
Let’s say you earn $4,000 per month before taxes. You could contribute 6% on your own ($240) and get a 3% match ($120) from your employer. Equaling $360 per month.
Beyond your employer’s matching 401(k) contribution, you save on taxes. Let’s say you’re in the 25% tax bracket. You’ll save $60 on taxes (your $240 contribution times 25%, your probable tax rate). Your take-home pay was only reduced by $180. ($240 – $60 = $180). Meaning that you get $360 for contributing $180 to your 401(k).
Boom! You just doubled your money.
Even better, you can keep on doubling your money with your 401(k) month after month, year after year. Show me another investment that’ll double your money every month with so little risk. (Come on… I dare you!) A 401(k) defined contribution plan is one of the easiest and simplest ways to grow your wealth. Everyone who works for an employer that offers a 401(k) plan should participate. And that could very likely include you.
2 Important Rules About 401(k)s
These two laws do apply to 401(k) matches and contributions. And it’s important to your finances to follow them:
1. Max out your 401(k) contribution, at least to the max of your employer’s 401(k) match.
If your employer matches up to 6%, put in the whole 6%. Remember, it’s free money. It doesn’t get any easier to double your money.
2. Don’t make early withdrawals from your 401(k).
One of a 401(k)’s key benefits is that your money grows tax-free. You also contribute with pre-tax money. If you withdraw early, you’ll pay an early-withdrawal penalty as well as the taxes that’ll now come due on that previously untaxed money.
Having said that, some 401(k) plans do allow for a “hardship distribution.” Meaning that the IRS won’t slap you with the 10% early withdrawal penalty. Their definition of “hardship” is an “immediate and heavy financial need,” such as medical or funeral expenses, or the monies needed to stop an eviction, but you’ll still be on the hook for taxes on that money. As well as responsible for fulfilling any of the other “fine print” stipulations of your plan.
Invest in Your 401(k) or 403(b) Like a Pro
Your employer determines which investment options are offered in their 401(k) plans.
One of the simplest choices is a stock index fund or exchange traded fund (ETF). Stock index funds and ETFs track one of the financial markets – for example, the S&P 500. They don’t try to achieve outlandish returns.
Because they’re not actively managed, their fees are shockingly low and some are even free. You want to look for funds with low charges. If an index fund charges 0.04% a year in fees, that’s a whopping 40 cents a year for every $1,000 you invest. This is a very low fee. The average ETF charges about ten times that. You could also opt for a managed growth fund with a good track record. Expect higher fees than an unmanaged fund. Some have track records that beat a certain index – like the Dow or the S&P 500 – and some have mediocre records. If a fund has a good track record, find out if the same manager is still at the helm.
As in all things investing, great past performance is no guarantee of great future performance. Managed funds actively try to beat the market, not just track it. Compare managed funds to unmanaged funds and decide which is best for you.
Make Your 401(k) Easy… Automate It
The best way to achieve your financial dreams is to automate as many parts of your financial plan as possible, like paying off your credit cards every month. It’s a smart way to cut the need for new decisions every month.
Setting up an automated 401(k) is simple. To get started, sign up for your company’s 401(k) defined benefit plan today. Then set up automated deposits into your 401(k), with automated purchase of shares every month or quarter. Now just stick with your plan.
If you’re self-employed and don’t have the option of a 401(k), sign up for a ROTH or traditional IRA with an investment brokerage firm like Vanguard. That way you can still have your money working for you, while you work for more money.
Despite the double-your-money promise of a 401(k), people still leave all that free money behind. Money that you’ll later wish you had in hand. Don’t make this retirement-robbing, dream-killing mistake. Sign up for your plan today.