Part 1 – Intro:
I will be a millionaire, easily. This is due to a few simple steps I did in my early 20’s. Do you want hundreds of thousands of dollars when you retire? Possibly millions?
Well, if you get your shit together at an early age, you can. Keep reading to learn everything you need to know and how to get started.
Why you need it?
Do you want to work for the rest of your life? We’re all going to get old eventually. Better yet, do you want to retire early? It should be obvious why you need to plan for post retirement.
What is it?
A 401K is an investment that grows. The purpose is for it to grow to a point where you can retire and not have to work again. It will give you the financial income you need to survive after your work life is over.
How does it work?
Simply put – It is money taken out of your paycheck and invested in a mutual fund. You select the percentage you want taken out of your check. The money is invested and reinvested over and over again with interest. This money will compound and grow to way than what you contributed.
What is the catch?
This money is meant for retirement. That means it is designed for you to not withdraw until you are retired.
Sorry, if you want to go on a shopping spree, or finance a vacation, this is not the place to find the money.
There are certain exceptions such as medical expenses, school tuition, home purchase, and a few more. The concept of a 401k is to discourage you from withdrawing the money until retirement.
Part 2 – Basic Questions:
How much can I contribute
There are limits per year to how much you can contribute to your 401K fund. The limits often change over the years. Just do a Google search for “401K limit”. In 2016 and 2017, the limit is $18,000/year.
-how does it get invested
This is the best part of employer 401Ks if it is offered. Employers will match your contributions up to a certain percent. That is free money! That is like a kid putting $10 in a piggy bank, and daddy puts in $1 on top of that, just because.
Types of 401Ks (percentage match, vesting option, company stocks)
What to do when there is no match?
What happens if you leave your job?
Part 3 – How to get started:
Already have one? Review it
Reviewing and understanding the intimating paperwork from work
What is it?
It is money taken out of your paycheck and invested in a mutual fund
Your employer may match a certain percentage
There can be a vesting period
There is a maximum allowed contribution
This money is non taxed, you are only taxed on your non retirement income
This money grows (compound interest) over time
It is accessible when you retire after age 59?
Give example with numbers
How it works
If your employer offers a 401k, sign up! After that, a percentage that you determine will be taken out of your paycheck. This percentage of money will be deposited into your 401K account, and it will be invested by the brokerage firm your company has selected and grow! This money is not taxed (you get taxed when you retire and decide to pull the money out). So not only are you putting a small percentage of your paycheck to the side for retirement saving, you are also growing that money exponentially.
This is the best part of employer 401Ks if it is offered. Employers will match your contributions up to a certain percent. That is free money! That is like a kid putting $10 in a piggy bank, and daddy puts in $1 on top of that.
The true power of a 401k
The best way to explain the power and benefit of a 401k is by showing you an example of compound interest –
Say John Smith gets started early at the age of 25 and contributes $15,000/year to his employee sponsored 401k until he is 65 years old. The total amount of money he would have contributed from his paycheck over that time would be $600,000. That is amazing! However, here is where the real power comes in. With that money being invested and the power of compound interest, that $600,000 will be almost $4.2 million by the time he is 65! This is assuming the standard 8% interest rate. Truth is, that is a low-ball (playing it safe) rate, so John’s potential is much greater!
To illustrate this example from a different angle, say John spend his early life goofing around and did not begin investing until the age of 45, he would have contributed $300,000 from his paycheck. That would have grown to about $740,000. You can see the importance of getting started early.