- By Emma Andrews
- Posted December 31, 2020
Why People Don’t Save in a 401(k) and Why You Should
One of the greatest fears that many people have is that they are going to run out of money before they die. They worry that they won’t be able to retire and take care of themselves. Even though this fear is widely shared, many people aren’t taking the right steps to prepare like investing in a 401(k).
They Don’t Understand How They Work
Many people don’t take advantage of the benefits of a 401(k) because they don’t understand how they work. A 401(k) is an account where you can stick a portion of your current wages for withdrawal after you reach your retirement age. There are several perks. One is that you don’t pay taxes on what you put in until you take it out. For example, if you earn $50,000 this year, but put $5,000 of it into a 401(k), you would only pay taxes on $45,000 this year.
So how does that help if you have to pay taxes on the $5,000 when you withdraw it at retirement? According to My Florida CFO, the best part about a 401(k) is that you can invest the money in it in stocks and bonds and avoid any taxes on your increase until you pull it out. That means that you can more easily build up your wealth without having the government sucking away your earnings.
They’re Afraid to Lock Up Their Money
Some people don’t like the idea of locking up their money in a retirement account. They feel that they need to keep that money in case they need it. Here’s the problem with that thinking. Most people aren’t disciplined enough to keep money set aside in their regular accounts. Chances are, if you keep your money out of your 401(k) you’ll spend it on something less important than your future. Furthermore, there are ways to access the money if you really need it. According to Franchise Gator, if you have a balance greater than $50,000 in a 401(k) or IRA, you can use this money to finance a business. If you need to withdraw the money early for other reasons, you can still get it out. It may incur a penalty, but that’s the price that you pay for the great benefits that come from the retirement account.
Company matching is perhaps the very greatest part about a 401(k). According to Ellevest, some companies will match a percentage of your contributions to your 401(k) up to a certain amount. For example, if your company offers a 50% match up to $10,000 a year, you could contribute $5,000 to your account. Your company would then add an additional $2,500 to your retirement savings. If you think about it, that’s a really good investment.
How exactly a 401(k) works is going to depend on your company’s plan. Depending on the terms, you may want to max out your contribution, or you may not. It’s usually best to make sure that you read the fine print about their 401(k) plan and then consult with a financial advisor before making your decision. If you take the time to set things up right, you can help secure a comfortable retirement for yourself.
For more help planning your retirement, make an appointment with us for some financial planning!