How 401K Plans Make Saving for Retirement Easy

The prospect of having to save enough money to pay for twenty plus years in retirement can be overwhelming. Most understand that the earlier you start, the fewer dollars you must invest, due to a longer time horizon. Yet, despite all of the statistical data supporting the need to fund retirement early, most Americans fall behind.

401Ks and other work sponsored retirement plans give employees a simple way to begin saving for retirement, with three key advantages.

  1. No account minimums. You do not have to accumulate savings before investing. Everyone meeting the employer’s qualifications for the plan can participate with as little as 1% of your income. Most companies allow you to adjust contribution amounts at any time, and the percentage you choose comes directly out of your paycheck. A 401K can create a professionally managed diversified portfolio without a required initial investment.
  2. Employer match. The majority of employers include an incentive to participate by matching donations. Sometimes the match is as high as $1 for $1, up to a certain percentage. Companies may allow for immediate vesting, meaning the money is yours regardless of how long you stay with the company. Others require additional service time to qualify for the match. Either way, it is a source of additional money for retirement that does not come directly out of your pocket.
  3. Automation. The most consistent savers automate the process. Contributions into a retirement account are deducted from your paycheck with pre-tax dollars, giving you an automatic process for investing.

With fewer companies offering pensions, 401Ks and similar retirement vehicles are a critical piece to retirement planning. You can set aside up to $18,000 per year in pre-tax dollars, creating a productive and simple way to begin or expand your retirement savings goals.