Not everyone has a 401k plan available to them. Moreover, all of them are not created equal by any means. Some of the 401k plans out there limit employees as to what they can invest in, perhaps in some cases too strictly. Then there is the amount the employer is going to match. You already get to invest tax-free, meaning out of your gross wages, but the matching is what really sets this financial vehicle apart from others when planning for your retirement. Check out Dave Ramsey for a starter if you want to follow fairly conservative, yet successful strategy to get out debt and build savings fast.
If you think about it, what the employer matches means you already have gained. Say you have a 401k account with your employer, and they match anything up to four percent. You decide that you want to put in four percent because you want the 100 percent automatic return that comes with that type of investment. Of course, depending on your salary and retirement goals, four percent might not be enough. Of course, you’re putting in eight percent of your income at this point with the employer matching benefit.
If you need more, you would have to go over the top of the four percent to say six or eight percent. The employer would still only match the original four percent of course. A 401k account is how my mom met her personal financial goals to save for retirement. In her early 40’s, she started working at a company that offered a great 401k plan and matching contributions of course.
I am self-employed, and while there are options available, you don’t get the matching part of course. Still, you can set up an IRA as well, and some people do both an IRA and a 401k plan. This way they maximize their retirement savings through accounts that get tax breaks. IRA accounts have annual contribution limits, and your 401k will have a contribution limit. However, a 401k plan contribution limit is usually a much larger percentage of your income
For example, you might be able to max your 401k plan at 25 percent of your income. An IRA plan would have much lower annual limits than that. If you have a 401k plan available to you and you’re not putting money away, it’s like you’re throwing money away, free money. If your employer doesn’t match contributions, then that’s unfortunate, but you still need to be saving for retirement. Remember, a 401k account provides you with tax advantages.
Right now, I am saving back money in my checking account and in other creative hidden ways because I need to have my emergency fund completely built up first. An emergency fund means something different to everyone, but to me, it means what I heard from one expert as three to six months’ worth of living. Then I am going to start funding an IRA or a brokerage account with mutual funds or ETF funds. I have invested before, but the 401k plan won’t be available to me. While I do have other nice options, if you have a 401k plan, count your blessings!