Everything a Millennial Needs to Know About Their New 401 (k)

December 10, 2019

The old saying, “Don’t put off until tomorrow what you can do today,” is very true for participating in a company sponsored 401k.

The most important thing that millennials have is time. Investing over time allows you to take advantage of what Albert Einstein called “the 8th wonder of the world”- compound interest. If you were given the choice between $1 million dollars today, verses one cent that compounded every day for 30 days, which would you choose? If you chose the 0.01 you would have chosen well and earned a whopping $5,368,709.12! Now you are most likely not going to find an investment that will compound itself daily, but the concept still applies.

Participating in a retirement account provides you with so many benefits which include tax deferral (“free money”), retirement savings, and financial discipline. For starters, it allows you to defer paying taxes now, allowing those funds to grow and earn interest and then be taxed upon distribution at a later time in retirement. When I have met with individuals fresh in their job, they feel like they couldn’t afford to put $50 a paycheck away. But know this, your $50 contribution is not taxed, so your take-home amount would not be less $50, it would feel more like $35 less. I recommend two things when it comes to knowing how much money to defer. First, if your company offers a match, you should take advantage of that. For instance, if they matched your contribution of 4% up to 4%, the total monies actually being invested on your behalf would be 8%! Don’t leave money on the table! A company match is a benefit assessed as part of your total compensation package that your employer has obligated to you. All you have to do is commit to saving for your retirement and defer.  

Second, when it comes to knowing how much to defer, a good rule is to start smaller and then gradually increase your percentage. I have seen people over commit in their saving initially, and then completely stop contributing all together, rather than reducing. The human psychology of money is a very intriguing character. If you have the motivation to fire-and-forget, the deferral becomes out-of-sight, out-of-mind monies. I like to tell our clients to not even think about this account as an access of funds for everyday use. Of course, you need to review on some sort of schedule, but you should treat qualified funds as untouchable. There are penalties and restrictions on early withdrawal of funds held in a 401(k).

Between qualified and non-qualified savings, it is strongly suggested that you save around 15% of your annual income for retirement. At this point, it is undetermined what benefits will be available to younger generations regarding social security, so it is important that you are financially disciplined to save for your own future. Participating in a 401(k) is a perfect opportunity to begin to become financially disciplined by establishing a plan to save for retirement by systematizing your contributions on a regular, payroll basis.
There are other means to save for retirement, such as IRA’s, Roth IRA’s, and non-qualified savings; however, tax deferral through a 401(k) would be the most advantageous in reducing your taxable income, the availability of contributing more to a qualified account and the potential to receive a match from a participating employer. 

Just remember, the most important part of building retirement savings is to actually start saving!

Cindy Little
Financial Advisor
Capital Investment Services

Any opinions are those of Cindy Little and not necessarily those of Raymond James.
This material is being provided for information purposes only.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal tax penalty. Matching contributions from your employer may be subject to a vesting schedule.