It’s the opening weekend of football and I’ve decided to tackle some of the tough excuses people make regarding personal financial planning. First up: 401k - Retirement Planning.
I don’t understand 401k's, so I just didn’t sign up.
- Every dollar that you put into your 401k reduces the amount of income that gets reported on your income tax, resulting in you being taxed less. For example, if you have $100 paycheck and you contribute $5 you will only be responsible for the taxes on $95.
I don’t want to lose a fortune.
- If you are concerned about risk, you can elect to put your entire contribution in low-risk or “stable” investment vehicles like CDs or bonds. You don’t have to understand how foreign exchange markets or stop loss agreements work in order to benefit from a 401k plan.
Isn’t the market really bad right now?
- The best time to buy is when shares are priced low. When the market rebounds, you keep your number of shares, and ideally the value increases.
I was told they were matching and then I didn’t get to take the money.
- All employers are different just how much of your contributions they match but most do match something. You don’t get to take their money with you when you go UNLESS you have been employed for the duration of the “vesting period” your employer stipulates. This is simply a period of time that you must stay employed if you want to take their portion of the contributions. If you are 100% vested the value in your account including their contributions, your contributions and interest earned on those monies goes with you.
I can’t use it till I’m retired, and I’m young.
- Granted you can’t withdraw the money without tax and penalty until you are 59 ½. However, 401k values build up fast because we often forget about them, and are a nice security blanket. You can take a hardship withdrawal from your account balance to pay for college tuition, medical expenses, acquisition of principal residence, to avoid foreclosure, and funeral expenses. You do have to pay taxes and penalty, but if you are on the verge of losing your home that is a small price to pay.
Make sure that when open enrollment comes around at your workplace, you are first in line to sign up this year!
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