Today I'm discussing your best financial friend and I bet you can guess who I'll be expounding about. Right. It's your 401k.
If your employer offers a 401k plan you should be taking advantage of the program. If your employer matches retirement savings dollars there is really no reason not to invest.
There are a number of reasons your 401k is your best friend and given today's economic climate your relationship to your plan should be even stronger today. Forget about returns for the time being and let's focus on the basics. There are five compelling reasons why you need to be saving for retirement.
The first reason is your investment is payroll deducted. You don't have to write a check every month. Payroll deducted retirement funds are out of sight, it's painless and easy.
Second, the funds are pretax. This is the best way to receive an immediate tax break. When discussing these plans I ask clients this, "If I ask you for seventy five cents and I returned you back a dollar would you do it." Of course the answer is yes. Then I ask, "Would you do that each day for the next year?" Again the answer is of course. This is all there is to pre-tax savings. Because you are paying less in tax in each pay check the overall amount invested is more than the net deference in your take home pay. Third, the earnings; interest and growth in the program are tax deferred. Keeping more money and allowing it to compound generates larger numbers. Need I say more?
Fourth, dollar cost averaging; Taking a fixed dollar investment and buying more shares at the lower prices and fewer shares when the price is higher is a great tool when trying to garner the best return possible.
Finally, employer matching dollar contributions, where else can you get "free money?" Let me explain:
Let's say you earn $50,000 and invest $5,000 a year and earn 5% annually on the funds in the 401k. Here are the projected numbers in the plan:
Over ten years your account grows to $64,753. If your employer offers 100% matched up to 3% of contributions they are adding an additional $1,500 to your account and all things being equal your account would grow to $84,163.
Still your best financial friend? You be the judge.
If you have questions, my team and I are ready and willing to answer those questions.
Michael Brandone, CLU, ChFC, CFP is a financial Services professional with over 25 years experience in financial planning. Mr. Brandone owns Horizon Financial Services a full service financial planning agency in Del Mar CA, He also owns Vue Insurance Services an Insurance brokerage firm in Del Mar, CA. To contact Mr. Brandone e-mail him at firstname.lastname@example.org or call 858-259-0131, ext 313. Securities and Advisory Services offered through Torrey Pines Securities, Inc a member of FINRA.