If your first job is with a company that offers you a 401 (k) plan, congratulations! A strong 401 (k) plan is an invaluable asset when it comes to saving for your retirement. But just having access to a 401 (k) plan doesn’t guarantee a prosperous retirement. You will need to take the necessary steps to invest in the plan in a way that maximizes all of its potential benefits. Here’s a look at the top reasons why you should invest in a 401 (k) when you first start out.
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Saving early means you don’t have to save so much
Simple calculations explain why you should invest in your 401 (k) plan as soon as you can. Compound interest is nothing short of miraculous, but it can only work if you give it time. Investing just $ 200 per month starting at age 21 will net you $ 1,895,502 at age 65, if you earn 10% per year. But look at how much you would have to contribute each month if you wait:
At 25, you will need around $ 300 per month to reach $ 1.8 million and above
At 30, you’ll need around $ 500 per month
At 40, you’ll need around $ 1,400 per month
At 45, you’ll need around $ 2,400 per month
The bottom line is that the earlier you start joining your 401 (k) plan, the less you will have to contribute to your plan in the future to meet your retirement goals. While it might be an adjustment when you’re just starting to put $ 200 into a retirement plan, imagine how much easier it will be than having to contribute $ 2,400 or more a month as you get older.
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You can get free money with your business
Most of the big companies with 401 (k) plans offer a match with the company, and this can be the biggest benefit of all when it comes to your retirement savings plan. Typically, companies will match 100% of a portion of your contribution, often up to a limit of 3% to 6% of your salary.
Imagine you earn $ 50,000 and contribute 6%, or $ 3,000, each year to your 401 (k) plan. If your business matches 100% of contributions up to 6% of income, it will deposit an additional $ 3,000 into your account.
In other words, with no effort or risk on your part, you’ll double your 401 (k) contribution each year and start earning interest on that money as well as your own contributions. If you start out young enough, you could end up with hundreds of thousands of dollars in matching funds by the time you retire.
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You will make a habit of saving
The secret that many people don’t know about saving in a 401 (k) plan is that it doesn’t take magic or luck to end up with a high six- or seven-figure portfolio upon retirement. You just need to get into the habit of saving early and often. A 401 (k) plan makes this easier with automatic deductions from your paycheck. If you start making these automatic contributions from your first job, you will quickly get used to the habit of saving. That alone could be the most important key to achieving a healthy 401 (k) balance and a happy retirement.
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Last updated: September 21, 2021
This article originally appeared on GOBankingRates.com: Why You Should Invest in a 401 (k) on Your First Job