I’ll be honest, I only have a loose understanding of 401k. Based on what I know, whatever amount I designate is to be taken out of my paycheck gasp and put into an account of some kind, where its free of taxes until I withdraw…at the age of 62 or whatever. And therein lies the problem – I’m impatient, and can’t imagine locking up what I earn for 40 years (I’m 23)!
Perhaps this is just me being short-sided, but I’d rather have access to that money now (where I can spend it on, say, school) as opposed to when I’m old, if I’m even still alive (if not, what a colossal waste, right?).
Now, to complicate matters, my employer does match my contribution 60% on the first 5% of my pay, which is essentially free money…40 years from now. If I understand correctly, I can withdraw funds early, but at a 10% penalty (is that right?) – would that not more than negate what my employer matches on my contributions?
So my question is two-fold: Why should I care about my 401k, as a 23 year old? And secondly, were I to contribute, would it make sense to contribute any more beyond the 5% my employer will match?
It’s an ant versus grasshopper thing. Little grasshopper, who exactly do you expect to support you in your old age? Are you planning to shoot yourself as soon as you turn 65? Spend your remaining years living in a cardboard box under a bridge? If you invest in your 401k now, you’ll have 40 years to build up savings that can weather the vagaries of the market. People who wait until their 40s and 50s to start saving for retirement are the ones who are screwed.
I might be wrong, but I think you can withdraw the unmatched contributions without penalty. You’ll pay taxes on it when it’s withdrawn, but there won’t be a penalty. So in that sense, it’s like regular savings.
You are 23 and it’s time to grow up and start thinking about your future. Life lasts longer than you think it will but will be over before you know it. You don’t want to get to the ripe old age of 62, be sick and tired of working but no have any way to stop because you failed to save. Suck it up and start contributing all you can to your 401k. While you are at it, get some whole life insurance and keep it paid up.
Jeez, Shaw wasn’t kidding when he said that youth is wasted on the young.
Hey, not all of us think this way! I’m 32 and have been in a 401K pretty much since I started in a “real” job; i.e. around 25 years old. It’s saving up.
I don’t want to work until I die, I fear I may have to, but this will at least help cushion those end years, and it’s being matched.
Do it. Life expectancy is longer than ever nowadays and chances are high you will live to longer than 65.
Because eventually you are going to want to retire, and that “free money” that your employer contributes, when added to your own money, will mean something. If you start now, you have a good chance of insuring your future.
The 401K contributions don’t have taxes taken from them if you set it up correctly. So the minimal amount you’re giving now reduces your tax burden, too. And since it’s taken out before you see it, it’s an easy way to save. And even if you do withdraw and pay the penalty, you’re still ahead because of your employer contribution.
Let’s say you put in $1000 per year and your employer contributes $600. If your money theoretically doubles every ten years, in 40 years you’ll have $12,800. From your lousy $1000. And that’s only for one year. If you contribute that much every year, you’ll have some serious money at retirement. Eating dogfood is highly over-rated and more expensive than you might think.
Why should you care?
Well, say you do live past 65. You’d like to retire at some point correct? You know, quit work all together, take up golf, travel, just hang out and chill.
Well living like that doesn’t come for free. You’re going to need a lot of cash to support this post 65 lifestyle. A LOT of cash.
No cash, no retirement, you work till you die be it 66 or 96. And waking up to go to work when your 96 just ain’t going to be a whole lot of fun.
So a 401K is a savings account for your retirement. But unlike a regular old bank savings account it offers benefits that will give you more cash when your 65.
Pre-taxed money, employer match, diverse investments.
So no you don’t need a 401K. But when I yell “hurry up back there old man” when I’m ordering my donut and coffee you better move your butt.
COMPOUND INTEREST
First, if your employer matches your money, there is absolutely NO reason not to participate. It’s free money you would not otherwise get.
Second, the earlier in life you start, even if it’s a paltry sum, the more you can make off compound interest. If you can afford a pizza a week, you can afford to save for retirement.
Definitely wrong. Can’t withdraw anything from 401(k) without penalty until you’re something like 59 years old. There are hardship withdrawals that are penalty-free under some circumstances, but they’re still taxable as income.
Roth IRAs, on the other hand: you can withdraw your own contributions penalty free, subject to some time constraints (I think the money has to be there for 5+ years but my memory may be faulty).
Red Barchetta: If you have access to a 401(k), as others have said, the sooner you start to save the better. You can’t count on Social Security to be there when you retire (I’m 49 and am not counting on much at all). At the very minimum, put aside enough to max out your employer’s contribution; you’re turning down free money otherwise. Even if you can’t spend it right now, you can look at your quarterly statements and see that money growing (well, hopefully, though this past week doesn’t offer much comfort!!!).
Also - this is getting deeper into tax consequences, but at 23, chances are your federal tax rate isn’t very high. So you don’t need the deductible feature of the 401(k). If your employer offers one, a Roth 401(k) might be better for you right now. Your contributions aren’t deductible, so you don’t save anything in taxes now… but you NEVER PAY TAXES ON THE PROCEEDS. Chances are your rate will be higher later on, so you might benefit from that variant rather than a straight 401k.
I started at 21. I’m 42. Brainiac4 started at about the same age. If we don’t save another penny, we won’t be eating catfood, thanks to the wonder of compound interest. Moreover, at 42, we have a million in assets (ok, less now) - a lot of that in retirement accounts.
If I die before retiring, it will still go to support my children, who can use it for college or getting a start in life.
If you are 23 years old and never intend on having anyone dependent on you, and you think you’ll die early - spend it now. If that might change, the earlier you start the more time you have on your side.
Trust us old farts, you won’t be 23 for long - and you’ll be 40 (50, 60) before you know it.
Iffy as to whether you’d still be ahead of simply keeping your own money, due to the steep penalties… if you take out your thousand bucks after a year, then you could lose about 40% of that - leaving you with 600 bucks. OK, with the matching, you’ve got 1200 (600 in the account from the boss, 600 in your pocket)… but with less-generous matching it’s not as clear.
On the tax: you don’t have to do anything to set it up - the payroll department will handle that automatically. Your taxable income will decrease, your and net taxes will decrease. Automatically. (Unless it’s a Roth 401K as I said in the other post; I have that option, at my work, so I did have to make the choice. Those aren’t that common yet though).
You should ask this question to my friends, a married couple, who bought themselves a small yacht and have been traveling the world now for about a year and a half.
These are two people who each made under six figures a year.
Once I retire, I plan on moving to a location that’s sunny and warm 365 days a year. I wouldn’t be able to do that had I not started my 401K along with my employee stock purchase enrollments when I was very young.
My Mom worked as a VP for human resources for nearly all my life. So I pretty much HAD to enroll just to shut her the hell up!
Obviously, I’m glad I did.
Don’t forget you can always take out loans against your 401k too. You should only do that as a last resort though.
I think your math is a bit off. The $600 from the employer will be taxed/penalized as well, right? So .60* 1600 = $960. But, remember that money was pre-tax. The equivalent $1000 coming out pretax would have been taxed at, say, 15%, or .85* 1000 = $850. $960 > $850.
Red, if you’re young and want to know about why this sort of thing is important, let me suggest the The Money Book for the Young, Fabulous and Broke by Suze Orman. It’s full of a lot of amazing tips and really easy-to-understand explanations of all this “money stuff.”
My mom got it for me when I was in my earlier 20s and while I’m not filthy rich at the age of 29, I would say I am better off than most single women who make my salary. And I have a really prosperous financial future ahead of me.
Someone who saves $100/year every year from the time they’re 20 until they’re 29 and gets a 7% return and then never adds another penny, just continues to earn interest, will have more money when she turns 65 than someone who doesn’t bother to begin saving until they’re 30 and then adds $100/year every year for the next 35 years.
You need to care at 23 because you probably will live past 65. You will probably want (if not need) the money then. At the very least get the free money.
Mamma Zappa - But you didn’t pay tax on that money the first time around, and you would’ve if you hadn’t put it in your 401K. So that $1000 might be normally taxed at 25%, leaving you with $750 take home if you hadn’t had it deducted. So with the employer’s contribution, less the taxes and penalties, you would have ($1600, -$400 (taxes), -$160 (penalty)) $1040, which is $290 more than you would’ve had if you had done nothing.
