Why you should invest in a 401K



Each month, financial expert Shay Olivarria answers personal finance questions from readers. This month she addresses 401 K contributions.

image


Reader: I just got a new job and HR gave me all this paperwork about my 401k. I’m not sure what “matching” is and I’m not sure if I want to give them my money. What should I do?

Congratulations on the new job. I’m thrilled to hear that your company respects its employees enough to offer a 401k retirement plan with matching contributions.

Let’s start from the beginning. Years ago, workers received pensions from their employers. For many retirees the pension, combined with Social Security payments, was enough to cover household expenses. For those with the foresight to save for retirement, the trifecta of savings, pension, and Social Security was enough to provide for many retirees to live pretty well in retirement.

Pensions are now a thing of the past. To make up for that, companies have started offering retirement vehicles that encourage individuals to invest to cover their retirement needs.

Most public companies offer a type of retirement plan called a 401k. The ones that really value their employees also offer “matching” contributions. That means that while you are encouraged to invest as much as possible towards retirement, your company will “match” the dollars that you contribute up to a certain point.

For example, if you contribute up to 6% of your income to your retirement account, then the company will match that 6%. It’s like a buy-one-get-one-free sale. If you earn $30,000 per year and contribute $1,800 per year (6% of your income) to your retirement fund, then your company will contribute another $1,800 to your retirement fund. If you contribute nothing then your company contributes nothing.

Keep in mind that matching contribution amounts differ from company to company, for those that actually offer the benefit.

It’s to your advantage to contribute as much as possible to your retirement account. There really is no down side to investing as much as you can, as often as you can. You’ll be safeguarding your retirement as well as getting free money from your employer.

Do you have a question you’d like Shay to answer? Email Shay at [email protected].

About Shay:
Shay Olivarria is a financial education speaker and the author of three books on personal finance. She has written articles for Bankrate.com, FoxBusiness.com and The Credit Union Times, among others. To find out more about her work, visit her at www.BiggerThanYourBlock.com.