Retirement
Why You Should Contribute to Your 401K?
By Financial-Shopper-Network.Com
Nov 30, 2007 - 7:47:15 PM

Before you leave your home or office, you should evaluate how you are saving for your retirement. This is the period of time when most people expect to earn less money than their working years. Therefore, most people use a variety of financial instruments including CDs, annuities, stocks, and mutual funds to fund their future retirement. Still, the most popular workplace retirement plan is the 401K.

The 401K product seemed to become a “household name” during the early 1980s. Many employers began to slowly eliminate the defined benefit plans for new employees. Why guarantee a worker a certain amount of income during his or her retirement? The defined benefit plan caused many employers to be strapped for cash. These companies were obligated to pay these former employers a set retirement benefit on a monthly or quarterly basis, etc.

Unlike the defined benefit plan, the main purpose of the 401K is for the worker like yourself to control his or her financial destiny. A 401K allows the individual to contribute a portion of his or her salary to the company sponsored plan. Some people contribute 3% to 15% of their salary to their 401K. Additionally, your company may match a portion of your 401K contribution and add this amount to your account; however, you will need to contact your plan administrator for more information. With a 401K, you get to choose from a variety of mutual funds within the plan to match your risk tolerance (e.g. moderate or conservative risk tolerance). Today, it appears that more employers restrict or limit the percentage of buying company stock in one’s 401K than five years ago.

While a defined benefit plan sounds good, it can cause your company to limit raises of current employees or might not be enough to meet your income goal during your retirement years. However, the money that you are promised under a defined benefit plan is usually guaranteed to be paid. On the other hand, a 401K makes no promise of paying anything at retirement. The amount of money in your 401K is determined by your contributions and those of your employer, as well the performance of the investments in your 401K account. The upside of a 401K is that you achieve your stated financial goal if the investments perform at a certain interest rate over a stated period of time. Conversely, the downside of a 401K is that you might have to work a few more years if your investments do not perform as expected.

The 401K gives workers the opportunity to save for retirement. It is a company sponsored plan that does not take away your contributions if you decide to leave the company. Depending on your years in the 401K plan and the vesting period, you might be able to take some of the employer contributions to your account with you, in the event of you leaving your current employer. Additionally, the 401K enjoys tax favored status; however, please contact your tax advisor to determine how this applies to your current situation. Nevertheless, saving for retirement in today’s world is now the responsibility of the employee; therefore, you probably should take advantage of your company’s 401K plan.