What Is a 401k?
According to dictionary.com, a 401k is:
A retirement investment plan that allows an employee to put a percentage of earned wages into a tax-deferred investment account selected by the employer.
But what exactly does that mean?
It means that in 1978, our government decided that they needed to find something that would allow people to save for their retirement with a fairly high rate of return. What they may have known was that Social Security was fast becoming something that a retiree could not depend on solely. In 2000, the Social Security Administration announced that Social Security could only pay 40% of the amount needed for typical expenses (housing, food, other general expenses). This doesnÔŅĹt include visits to the see the grandkids, or the cross-country Winnebago trip youÔŅĹve been planning for years.
So, where do you get the other 60% to cover your expenses? What if I told you that if you invest $100/month into your 401k for the next 20 years, with a company match of 50%, you could save almost $180,000? On the other hand, if you contributed $100/month to a bank savings account for the same amount of time, you would save around $40,000.
Investing in a 401k is simply the best way to save for retirement. According to the PSCA (Profit Sharing/401k Council of America), Americans have invested $1.5 trillion in 401k plans. Investing in a 401k not only sets money aside for retirement, but also allows for your employer to match your contribution and for professionals to manage it. The best part is that it comes directly out of your paycheck; you donÔŅĹt have to remember to set that money aside. And since the money is removed from your paycheck before taxes, the withdrawal makes your take-home salary slightly lower, allowing you to be taxed on lower earnings, thus saving on taxes as well!
How do 401ks work?
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