How to Avoid Retirement Debts: 401K

The need to save for retirement has never been greater than it is today. Company pension plans are all but a thing of the past, Social Security has an unsure future, and life expectancy rates continue to climb. All of these factors point to an increased need for individuals to institute a saving program that will be available for use in their retirement years. The alternative is a delayed retirement or increased amounts of debt. Since neither of these alternatives are very desirable a significant amount of savings needs to be secured for the future. One of the most useful savings tools available for this purpose is the 401K.

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A 401K is a savings program that is available through an individual. s employer. The employer selects a company to act as plan administer. There will generally be several investment choices from which to choose. Often times these investments include CDs, mutual funds, and company stocks, if applicable. Employees are given the opportunity to place certain amounts of income into these investments each pay period (up to a certain percentage). These investments are not taxed at the time of the deposit which reduces the amount of taxable income. This results in an increased investment total which continues to accrue interest until retirement when the funds are withdrawn. The earnings on these funds are likewise deferred until the time of withdrawal. Another major benefit of the 401K is that many companies will match as much as 100% of your investment up to a certain amount. For example, if you place 7% of your salary into your 401K a company may match your investment dollar for dollar for the first 5%. In this scenario the remaining 2% would not be matched.

Tips for Investing in your 401K

Begin now. The sooner you get started the sooner that the interest will begin to accrue. Let the power of compound interest work for you.
Take advantage of your matching offers. If at all possible contribute the full amount of money that your company will match.
Transfer money to an IRA if you change jobs. Do not cash out of the program. The full value of a 401K is not realized until retirement.
Do not remove money. Taking money from an IRA subjects you to a stiff penalty and lessons the affect of compound interest.

Consider stock mutual funds. Stocks carry more risk but they offer more upside. Over the long haul they generally produce a greater return on investment. If you are still years away from retirement than this is a good option to consider.

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.