Saving for Retirement: Why you should always max out your 401(k)
Saving for retirement doesn't have to be difficult. The problem
for most people is simply that they put it off - they wait way
too long to begin saving, and they suffer as a result. One of
the easiest and cheapest ways to make sure you've got enough
money to actually be able to retire and not end up as a greeter
at Wal-Mart to make ends meet is to max out your 401(k) every
month. All you need to do is elect to contribute the maximum
that your company's plan allows as a percentage of your income.
This will usually be roughly in the 10% range, but it can vary
depending on how much you make. Why should you max it out?
First, it won't make as much difference in your take home pay as
you think. Contributions are not taxed, so you'll be paying
significantly less in your withholding. Second, it's free money
- the money you save in taxes is money that you are throwing
away. It's like an immediate 25%-30% return on your money just
by putting it into the account. Why would you give that up? It
usually takes three years or so in the stock market to make that
much, so it's pointless to throw away an immediate gain. Also,
many companies will match your contribution, making it even more
worthwhile. Finally, it's a good idea for many people who don't
have the discipline to save otherwise. If you spend your money
as you get it, it's better just to keep yourself from getting it
in the first place. Once it goes in that account, just make sure
it stays there - there are significant penalties for early
withdrawal.