Why You Should Invest in a 401k

Why You Should Invest in a 401k

So I have a confession. I worked for my current employer for two years before contributing to the 403b offered (which is just like a 401k). Two years! How could you do such a thing?? you’re probably definitely wondering, as you rip your hair out in frustration. Well, to be quite honest, at my company’s orientation meeting, the HR rep said “retirement” and I immediately sailed off into a daydream until the word “lunch” snapped me back to reality. Retirement was something I’d think about someday when Johnny was balding and we had three or four kids and a golden retriever named Hank.

But I soon learned that there’s no time like the present to begin retirement savings, and the sooner the better. And so I jumped on my company’s 403b horse and have been riding ever since. Getting started with a 401k is pretty simple. The more difficult part is convincing yourself that it’s worth it to say goodbye to a small chunk of your paycheck each month with the promise that it’ll be worth it 20, 30, or 40 years down the road — or even 5 years.

So if you’re sitting on the fence between YES 401k or NO 401k, let me share a few reasons why Johnny and I have each chosen to invest in one.

1. FREE Money

Free money, free money! Read all about it! If your employer offers a 401k, chances are they’re matching. They might match 3% of your salary at 100% or perhaps 5% at 50%. If 3% of my salary every month is $100, and I contribute $100 to my plan, my employer would add an additional $100 for a 100% match. Which equals $200! Yay! Or, if 5% is $100, and I put in $100, my employer would put in $50 for a 50% match. In both cases there is free money to be had.

Note on Becoming Vested: Oftentimes if a company matches its employees’ 401k or 403b contributions, the employees will have to wait a number of years before they are fully vested. For instance, I am 100% vested with my company after 4 years. If I quit before that time, I will not collect all of my company’s 403b contributions. After the first year, I only get 25% of my company’s contributions. After 2 years, only 50%, and so on. However, whatever money I contribute myself is 100% mine from day one.

2. Contributions are Tax-Deferred

Whatever money you put into a 401k is tax-deffered, which means it’s taken out before taxes. And that means Uncle Sam doesn’t include that in your taxable income come tax season. Holla! On the flip side, when you finally do cash out, you’ll be taxed. But at the end of the year if you’ve put in $10,000, that’s money the government can’t touch.

Note on contribution limits:  There is a limit on how much money you can put into your 401k. As of 2013, the limit is $17,500.

3. Compounding Interest

The earlier you jump in, the more money you stand to gain in the long run, thanks to a little principle called compounding interest. The interest that you earn starts earning its own interest. Basically all your money starts having babies. And their babies have babies. And the longer time you give it, the more babies there will be. The key is duration of time. I’d show you a graph with a gradual incline that suddenly spikes upward, but I’m not very good with Excel. So just pretend that you see it in your head. And trust me that lots of money babies are a good thing.

4. Your money goes with you

If and when you leave the job that’s been giving you “free” money through your 401k, your money comes with you. You might have to roll it over into an IRA, but the important thing is that that money is yours. And if you’re fully or partially vested, the money that your company’s been contributing gets to come with you, too.

5. Saving for Retirement Becomes Easy and Automatic

Johnny and I know money’s being taken out of our paychecks each month before they land in our bank accounts, but it really doesn’t seem like it. It’s much less likely we’ll miss money that peaces out before our eyes ever see it. The difference is that all the other money being taken out for taxes or insurance premiums is gone forever. The money being taken out for your 401k is going to a fertile place where it will be cultivated and reproduced — at least that’s the plan. Sounds like a win-win to me.

And those are the main reasons Johnny and I said “I do” when our company’s 401k’s popped the question. We’re living in wedded bliss, and plan to both keep giving to this relationship until our day of retirement comes. Will you say “I do” too?

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  • Reply Halsy June 26, 2013 at 8:35 am

    Great info! You have reminded me I need to roll over my old companies retirement plan into a 401k! I would also say for those stay at home parents it is a good idea to look into spousal IRA’s-especially if you plan to stay home for awhile.

    • Reply Brian June 26, 2013 at 9:00 am

      You might want to look at rolling over your old retirement plan into an IRA. They typically have less fees and better investing options. Of course you could be working for a company now that has a really nice 401k with low fees and lots of choices.

      • Reply Halsy June 26, 2013 at 11:14 am

        Thanks I actually meant to say IRA!

    • Reply Joanna June 28, 2013 at 2:52 am

      Great tip, Halsy! Thanks for sharing!

  • Reply Tushar @ Everything Finance June 26, 2013 at 9:00 am

    I love saving for retirement. Every penny I put away brings me closer to my goal! I’m glad you started to take advantage of the option, you’d be missing out if you hadn’t!

    • Reply Joanna June 28, 2013 at 2:53 am

      Yes, that’s a great attitude, Tushar!

  • Reply Emory June 26, 2013 at 9:42 am

    This is such an important topic! My husband’s job currently doesn’t offer retirement benefits until he gets more hours, but we went ahead and opened up a Roth-IRA so he can begin putting some money away. Unfortunately the the Roth account we do see the money leave our bank account, but it’s still worth it. If you don’t have retirement options through your job I would encourage looking into either a spousal IRA as mentioned above or a Roth account if you can bare to part with the cash after taxes.

    • Reply Joanna June 28, 2013 at 2:55 am

      Way to take the initiative to open up a Roth IRA. It’s definitely worth it, and it sounds like you guys are making smart decisions.

      Johnny and I both have always had retirement options with our work, but I’m curious to learn more about spousal IRAs now that a few of you have mentioned it!

  • Reply Sara @ Fit.Fun.Femme June 26, 2013 at 10:16 am

    AWESOME post! There are so many young people who don’t take advantage of 401Ks and it’s such a no brainer. We both invest – but a good reminder to others. Y’all are the best!

    • Reply Joanna June 28, 2013 at 2:56 am

      Thanks, Sara! Glad to hear you and your man are taking advantage of your retirement options!

  • Reply Jennifer @ Budgeting in Baby June 26, 2013 at 10:52 am

    I definitely feel guilty for not having a 401k however between putting away for retirement or trying to get out of/not get further into debt, I have chosen the latter. Hopefully after I finish my degree I will be able to start contributing to a 401k.

    • Reply Joanna June 28, 2013 at 2:57 am

      Yes, sometimes you have to choose one or the other, and it sounds like you’ve thought it through and made the choice that’s best for you. You’ll never regret becoming debt-free!

  • Reply Jake @ Common Cents Wealth June 26, 2013 at 11:14 am

    I contribute to my company’s 401k for the exact reasons you listed above. I can’t believe how many people don’t take advantage of the free money out there. My company matches 4.5% if we contribute 6%, which means that my contributions get a 75% return instantaneously. Show me another investment that would give me that kind of return on a regular basis. Plus, hopefully after 40 years of compound interest that amount has grown to be more than I could’ve imagined.

    • Reply Jane Savers @ Solving The Money Puzzle June 27, 2013 at 2:18 am

      My employer contributes a small percentage for everyone but will match a smaller amount as well.

      I have never understood if the people who won’t contribute up to the match don’t understand, can’t see the benefit of the regular payroll deductions or if they just truly can’t afford it. I can’t afford to let free money pass me by.

    • Reply Joanna June 28, 2013 at 2:58 am

      Great points, Jake. Glad to hear you’re taking advantage of your company’s match!

  • Reply Chris June 26, 2013 at 11:48 am

    I put in 3% and they match 3%. I don’t play when it comes to my 401k. Do you choose the prepackaged investment stuff or do you try to customize it? I always choose the most aggressive investment strategy. Because I live life on the edge and whatnot. I never really put in a lot of thought to my 401k until recently, and I think depending on what a company offered me in terms of benefits, a 401k would be near the top of important things to ask about. Because really that 3% match adds up quickly!

    • Reply Joanna June 28, 2013 at 3:04 am

      I agree… retirement benefits are definitely a huge perk to working for a company.

      I am currently doing a prepackaged investment for my 403b, which is supposed to be maximized for the year that I’m going to be retiring, if that makes sense. And I think Johnny’s doing his prepackaged as well. But you know what they say, without risk there’s no reward!

  • Reply E.M. June 26, 2013 at 1:15 pm

    This is a great simple post on the benefits of contributing to a 401k plan. I especially loved the money babies part. Unfortunately, my employer does not offer a 401k, so I am looking to open an IRA very soon. I think the next time I have to job search I will make sure the future company offers a 401k because it’s a no-brainer to contribute to, and I really dislike the fact I don’t have access to one right now as it’s a year and a half I’ve missed out on! Partially my own fault for not opening an IRA sooner, but I didn’t know better.

    • Reply Joanna June 28, 2013 at 3:11 am

      It’s definitely something to look into when you’re thinking about starting a new job! You’re smart to make your own retirement plans in the meantime!

  • Reply Meghan June 27, 2013 at 12:16 am

    One of the biggest perks of this job is the 5% match!

    • Reply Joanna June 28, 2013 at 3:05 am

      That’s a great match, Meghan! Glad to hear you’re taking advantage of it!

  • Reply Shauna June 27, 2013 at 8:25 am

    Thanks for the simple post about 401ks. We need to roll over my husband’s from an old job into an IRA. Any recommendations on where to get one of those?

    • Reply Joanna June 28, 2013 at 3:08 am

      Are you thinking a Roth IRA? Most investment companies offer Roth IRAs, and you can get started through them. We’re actually planning on opening one soon, and we plan on doing a post on the process soon!

  • Reply Mark June 27, 2013 at 6:06 pm

    Good article… It’s always good to go back to basics. When we do our live presentations it always amazes us at how many people are not taking advantage of the “FREE MONEY” being thrown at them by their employers.
    You hit also on vesting schedules for EMPLOYER contributions but many participants think that THEIR (EMPLOYEE) contributions follow the schedule as well. Remember, anything that you “defer” (a.k.a. “contribute”) is always, always, always 100% YOURS whether you work for your employer for a year or 50 years.

    – Mark

    • Reply Joanna June 28, 2013 at 3:09 am

      Yes, very important to remember, Mark. If people could realize that, they’d see that there’s really no downside to investing in a 401k!

  • Reply Chris @ Awesome Financial Future June 28, 2013 at 1:45 am

    Great freaking article – and congratulations on your wedded bliss(es)! In a few short decades, you’ll be on Easy Street, thanks to the truckload of cash your future selves will inherit – from your current selves.

    • Reply Joanna June 28, 2013 at 3:08 am

      Thanks, Chris! That’s the plan, anyway. Here’s hoping!

  • Reply Esther Kim September 11, 2015 at 4:52 pm

    Word! Love the article and the helpful tips — especially “Saving for Retirement Becomes Easy and Automatic.” If the 401k plan has auto-escalation, even better! #winwinwin

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