[ad_1]
In the United States, about 78% of employers who offer 401 (k) pension plans pay matching contributions, according to the Investment Company Institute (ICI). A consideration means that for every dollar paid by an employee to his plan, his employer pays a corresponding amount, usually 50% or 100% of the employee's contribution – up to a limit. In most cases, companies pay between 50% and 100% of employee contributions, up to 4% to 6% of the employee's salary, although some plans contribute more. In other words, if you earn $ 75,000 and contribute 5% of your salary to a 100% matching company, you contribute $ 3,750 a year, and your employer pays $ 3,000. $ 750 extra.
But what if your employer is part of the 22% do not provide a match? Is it always a good idea to invest in your 401 (k)? Generally, yes, for four main reasons.
SOURCE OF IMAGE: GETTY IMAGES
4 reasons why the 401 (k) s are excellent retirement savings vehicles
First of all, it is essential to save for retirement. Social security benefits, even with a recent cost of living adjustment, will cost an average of only $ 17,532 next year. A comfortable retirement will probably require your own savings.
Second, the 401 (k) allows you to save for retirement, which reduces your tax bill and could put you in a lower tax bracket. Your savings become tax free over the years and is subject to income tax only when you withdraw funds from 401 (k).
Third, the amount that Americans are allowed to pay each year to their 401 (k) is much higher than the limit of the other widely available pre-tax retirement vehicle, the Individual Individual Retirement Account (IRA).
In 2018, for example, the maximum allowed contribution of 401 (k) for individuals is $ 18,500. If you are 50 or older, you can save $ 6,000 more, for a total of $ 24,500. With an IRA, the maximum is $ 5,500 if you are under 50 and $ 6,500 if you are 50 or older.
With regard to retirement savings, the more you are able to reduce your expenses, the more income you will have as a retiree. If you invest $ 10,000 a year, for example, you will have $ 156,455 in 10 years, assuming an annual return of 8%. After 30 years, it will increase to $ 1.2 million, assuming the same annual investment and the same rate of return.
Fourth, employer-sponsored 401 (k) contributions can be purchased through payroll deductions. People are 15 times more likely to save for retirement if payroll deductions are available, according to the American Association of Retired Persons (AARP).
But make sure your options are good and your fees are low
That said, you need to know some things about your workplace retirement plan before you can decide if it is the best vehicle for your retirement savings.
The first concerns the proposed investment options. The plan should provide a reasonable range of choices, including stocks, bonds and money market funds. You should be able to build a balanced retirement portfolio from the choices that are available to you.
The average 401 (k) plan offers about 13 equity funds (about 10 US funds and 3 international funds), according to ICI. If your plan offers a lot less, you need to ask yourself if it works for you.
Many companies offer their own optional stock (or match it partially or only with the stock of the company). While this may be attractive, you want to make sure that this is not your only option. Why? If your company is underperforming or if its sector is experiencing a slowdown, your salary, your prospects for advancement, and pension funds will all be under threat. Diversification can help prevent a simultaneous blow to all three.
The second area you need to investigate is fees. High fees can hurt the performance of a 401 (k), just like any other investment. While there is no hard and fast rule, 401 (k) averages 1% of fees, according to the Center for American Progress, while some others charge a lot more.
Let's look at three cost scenarios. Suppose you start saving $ 5,000 a year in your 401 (k) when you were 30 years old, up to age 65, and that the 401 (k) has generated an annual return of 7%, in average. If you never paid a fee, you would have $ 691,000 in your 401 (k). However, even a small fee can dramatically reduce your savings in the long run.
If you pay a modest fee of 0.5%, it will cost you $ 71,000 over 35 years, leaving you with $ 620,000. It would cost $ 580 more each year to offset the cost of these costs.
The average tax of 1%? These fees would cost $ 134,000 over 35 years, leaving you with $ 557,000. If you want to offset these costs, you need to save an extra $ 1,200 a year.
If your 401 (k) fees are high at 1.5%, they would reduce your savings from $ 190,000 to age 65, leaving you $ 501,000. You would need to pay an additional $ 1,900 each year to replenish the fees.
Over time, the impact is significant. In fact, 16% of the 401 (k) plans had fees high enough to offset the tax benefits for younger employees, according to Yale Law Journal.
There is a wide variety of fees: administration fees and investment fees are the two main categories, although you can also see fees such as commissions if you invest in mutual funds.
Frankly, finding the fees is not the easiest task. You can start by asking your company's benefits manager what types of fees charge your 401 (k) fees and how much each would cost you. If you do not get a detailed breakdown, you may need to consult your 401 (k) fee yourself. Consult the prospectus before investing or the quarterly returns that 401 (k) plan administrators are legally required to send. These are often available online or sent to you electronically.
If you do not have a range of reasonable options, or if the fees can significantly reduce your retirement savings, all is not lost. No one is required to save in a 401 (k) plan, after all.
An IRA is a reasonable alternative
If your options are rare or if the fees are high (or both), the best way to save for retirement might be to open an IRA. There are two types: traditional, which offers the same advantage of pre-tax savings as a traditional 401 (k), and Roth, which is an after-tax plan, but which is not taxed during a withdrawal. (For more information on choosing between IRA types, here is a guide.)
With a self-directed IRA, you can invest in mutual funds or stocks of your choice. You can choose as many funds or stocks as you want, looking for both expected performance and fees to help you make informed choices.
[ad_2]
Source link
