Why should I invest in my 401K?

April 07, 2015

For those of you who need a reminder of why your paycheck is smaller and for those of you who haven’t started investing in your 401k – YES, you need to and this is why.  As a reminder, a 401k refers to a section of the tax code that lets an employee invest with pre-tax dollars in to an investment plan.  The money grows tax free and is sometimes matched by the employer.  Taxes are not paid until withdrawal of the funds, penalty-free, at 59 ½.  The most obvious reason to invest in your plan is that it is automatic savings – you are paying yourself first before any other bill.  Saving for retirement should be a priority in everyone’s life.  There are very few companies that offer pensions these days.  Most of us will be living on social security and our savings.  Social security was designed to be an income supplement not a primary source.   

Another reason is that there is often free money up for grabs.  Many employers match a certain percent of your salary and if you do not contribute, you do not get that extra money!  It may be thousands of dollars that you are entitled to but not getting if you do not at least max out your match.

Low cost investment options that make it easy for the average investor to choose are another good reason to invest.  If you are not comfortable putting a portfolio together, most plans now offer target date funds that reallocate investment mixes to become more conservative as you near retirement.

And, lastly, the effects of compounding are vast.  Compounding is generating earnings on your reinvested earnings.  So, simply put, if you invest $1000 and it generates a 10% return, you earn $100 in year 1.  The next year, you earn 10% again on $1100 and that equals $110.  You can see how, over time, the gains can be substantial.    The earlier you begin investing the greater the compounding effect.  Please consider signing up for your 401k at work or increasing your contributions to take advantage of these benefits.

“This is a hypothetical example and not indicative of any investment product.”

 “This material is for general information purposes only and is not intended to provide specific advice or recommendations for any individual.  To determine which investment(s)/advice may be appropriate for you, consult your financial advisor prior to investing.”