You should invest at least enough to receive your employer’s match, even if you’re focused on getting out of debt or saving for a house. This is “free” money that you otherwise would be passing up, and it can greatly affect your future. You may struggle in your retirement years if you don’t save adequately now.
How Contributions to a 401(k) Affect Your Paycheck
Contributions made to a 401(k) are made on a pretax basis. This means that your taxable income is reduced, so the amount you pay in taxes is less. Your take-home pay won’t be affected by the same amount you contribute. It might decrease slightly, but not by much. Making your first 401k contribution can be the starting point of your retirement savings, then you can use the rest of your excess income toward getting out of debt. Once you’ve done that, it’s recommended that you increase your retirement savings to 15% of your gross income. Retirement savers can additionally set a personal goal to increase lower initial contributions by 1% to 2% annually or use an auto increase/escalation tool if one is available in their 401(k) plan. Of course, a saver isn’t restricted to a specific incremental increase, and higher bumps up are a good thing. The money you contribute now will grow exponentially over the years, and it’s important not to waste the extra time you have to grow your retirement savings.
Think about the long-term benefits of investing in your retirement. They’ll make life easier in the future.Focus on contributing regularly. The market will go up and down, but you should be in a more comfortable position when it comes to retiring if you continue to invest. A traditional 401(k) is a good option because it can reduce the amount you pay in taxes now, which may make it easier to continue investing when money is tight.
How a Roth 401(k) Affects Take-Home Pay
Your contributions will directly affect your take-home pay if you have the option of a Roth 401(k) because your contributions are made with after-tax dollars. The biggest advantage of the Roth 401(k) is that the earnings aren’t taxable. This can end up saving you a lot in taxes once you’ve reached your retirement years. A Roth 401(k) is similar to a Roth IRA in that your contributions won’t reduce the amount you pay in taxes each year. But the benefit of not paying taxes on your earnings can pay off when you reach retirement age.
A Roth 401(k) allows you to avoid taxes on your investment earnings. This can be a good option if you are not worried about lowering your taxable income.
If You Don’t Qualify for a 401(k)
The sacrifices you make now will prevent you from making difficult decisions once you retire. You may want to consider other investments if you max out your allowable 401(k) contributions. You should still be saving for retirement if your company doesn’t offer a 401(k) plan, or if you have to wait for a year to begin participating. You can do this by setting up a Roth IRA account through a brokerage firm or a bank. The money should be invested in mutual funds, and you can sign up with an institution that will accept monthly contributions without a fee. This will get you started saving for retirement right away. Talk to a financial advisor who can take you through the steps and help you set up an account if you’re at all uncertain about how to start investing for retirement on your own. More aggressive and riskier investments can help you earn more if you’re still young. But you should move to more conservative investments that are safer as you get older. You might not have enough time for the economy to recover if it goes through a slump.
