3 Reasons Why Your 401k is So Important

Last updated on: March 3, 2014 at 7:52 am by Tim

3 Reasons Why Your 401k is So Important 2014-03-03T07:52:11-05:00 Tim

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Saving for retirement comes with a dizzying array of options. Which retirement account should you choose? Which investments within that account do you really need? What if you make the wrong account choice and can’t get a specific investment that you need? With so many options many people find themselves in analysis paralysis. They aren’t sure which the best decision is, so they don’t make any decision at all. This delays their investment of funds for retirement which eventually means their nest egg isn’t as large as it could have been.

Why Your 401k Should Be Your First Retirement Investing Option

In the sea of retirement options your 401k sits like a lighthouse on the shore, guiding you to retirement. Utilizing your 401k is one of the best retirement decisions you can make. Here are three reasons you should be investing in your 401k.

It’s Easy

Sometimes the best investing decision you can make is the easiest one. Your 401k is already associated to your employment, and you have easy access to change your investments, your allocations, and how much money comes out of each of your paychecks to put in your retirement account. You don’t have to think about all of those calculations outside of work – it is all right there in front of you. There’s no need to decide which broker to go with or having to deal with the hassle of setting up automatic withdrawals. It’s all tied to your payroll department, which makes changes a lot easier.

It’s Free Money

A majority of employers that sponsor a 401k retirement plan also offer some sort of matching money for your investments. Matches can be as generous as a dollar for dollar match up to a certain percentage of your salary or as low as a set dollar amount regardless of how much money you save within the plan. No matter how stingy your employer match is, as long as you are getting a match of some kind on the money you save you should put money into your retirement plan. If your plan limits your employer match to a certain dollar amount, try to put at least that much money into the plan before changing to another retirement account. If you don’t get the full employer match offered you are essentially turning down absolutely free money.

It’s Already Setup For You

When you start work your employer hands you a packet of boring but critical information about time off, benefits, and your retirement plan. Many employers now automatically enroll you into the 401k plan into a conservative money market fund at 3% of your pay. You have to read the forms and intentionally opt out if you don’t want to automatically open the account. Employers do this because they know inertia can kill your decision to open an account. You would decide to review your options and “some day” open your 401k. “Some day” turns into years, and your retirement is negatively impacted. If they automatically enroll you at 3% you probably won’t notice the money taken from your check, and at least you will have some progress toward retirement. And just because your employer automatically enrolls you doesn’t mean you shouldn’t change where the money is being invested – companies don’t want to be blamed for market losses so you are usually enrolled into the safest (and thus, lowest return) investment offered within the 401k.

Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Moolanomy, ING Direct, and many others.

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