To many, retirement seems like an impossible puzzle of moving parts that never seem to fit together quite right. While saving for retirement can be complicated, it doesn’t mean you shouldn’t take the time to learn some important aspects of retirement savings. For example, one of the most common retirement plans is a 401k. You may have heard of one, but they are often overlooked. What exactly is a 401k and how can it help workers achieve their retirement goals?
What Is A 401k?
A 401k can be thought of as a retirement savings vehicle. It is a program that some employers offer their employees to help save for living expenses after their career is over. Within a 401k, employees can choose to use this money to purchase stocks, bonds, and other funds that can potentially appreciate in value over time. Although many feel that this is locking away your money for many years which can’t be accessed without paying the penalty until a specific date, many benefits make it worth the wait.
What Are Its Benefits?
The most notable benefit to a 401k is that it acts as a tax shelter. There are two different types of 401k’s, and they both have respective advantages. The first is a Traditional 401k which allows employees to make contributions before taxes are taken out of their paychecks. This can lower their tax liability and keep more money in their pockets each year. A Roth 401k, on the other hand, involves making contributions after taxes have already been taken out. The benefit to this is that there are no taxes then paid once the employee begins to withdrawal from the account. Also, employers at times offer matches to add even more to these retirement accounts as a perk of working for the company.
When Should You Start Saving For Retirement?
One thing about being young and having a 401k is that you have something on your side that the older employees at the company do not. This advantage is time, which can prove to be one of the most critical factors of the total amount an employee has saved when they decide to retire. Time allows for the magic of compound interest to do its thing. This is the process by which the interest gained on a particular security also increases interest, thus, sending retirement savings into overdrive.