When you’re in your 20s, retirement definitely isn’t at the forefront of your mind. Retirement seems like a distant thing, like an idyllic scene clipped from a Brooks Brothers catalogue—I envision an older couple reclined in leather chairs, sipping stiff bourbon drinks, a jovial spaniel sprawled at their feet. Until recently, I, like most of my peers, was much more concerned with saving up for a new pair of stilettos than saving up for the golden years. But as soon as I started working, I realized that it’s never too early to start planning for retirement, no matter how young you are. And 401(k)s are the single most powerful tool for doing just that.
I remember my first day of work at my first “real” job distinctly. As soon as I got to the office, the HR woman presented me with a mountain of new-hire paperwork and kindly walked me through the various forms I needed to fill out. When she got to the 401(k) documents, she explained that I could select a particular fund to invest in and told me that the company would match 50 percent of my contribution up to 6 percent of my salary.
I blinked and nodded emphatically, pretending like I understood what she was saying, all the while thinking, “WTF is a 401(k), anyway?”
Until that day, the prospect of retirement had never really crossed my mind. Retirement, to me, was synonymous with Florida and golf and smiling silver-haired couples on the cover of AARP Magazine—in other words, it was years and years down the line, something I wouldn’t have to worry about for 40 years. I was chiefly focused on planning my Friday night, not my retirement. Later on that evening, as I stared blankly at the 401(k) forms, puzzled by all of the graphs and charts and financial jargon, I did what I always do when I’m in a state of financial confusion: I called my dad.
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“Dad, what the heck is a 401(k)?” I asked. “It’s optional…do I even have to do this?”
“Yes,” he answered without missing a beat. “You absolutely have to do it.”
He gave me a quick rundown: Put simply, a 401(k) is a retirement savings plan sponsored by your employer that allows you to save and invest a portion of your paycheck before taxes are taken out. Employers will usually “match” a percentage of your contribution, and my dad encouraged me to contribute the maximum percentage my company would match.
“So then I’d be taking 6% out of my paycheck, right?” I said. “But—that’s a lot!”
“Trust me,” my dad replied. “Just do it.”
Still not convinced, I did some poking around on Google and came across this nifty 401k savings calculator. I plugged in some numbers, and what the calculator showed me was pretty darn impactful.
Let’s say you’re 22 and making $35,000 a year. If you elect to contribute 6% of your annual salary to your 401(k) plan, that’s $2100/year going toward retirement. On top of your $2100 contribution, your employer will provide an additional 3% of your paycheck (or 50% of $2100). That equals $1050 in “free money,” essentially, that will someday be yours to spend as you choose. That money adds up over time: If you continue to defer 6% of your paycheck to your 401(k), by age 65, you will wind up with $828,128 in savings. And that’s assuming your income stays stagnant over the course of your career; if your salary jumps up to $60,000, you’d be left with even more money in the bank. Pretty cool, huh?
In other words, by making small monthly investments now, you can someday retire with enough money to reap the benefits of your golden years, giving you the financial security to settle down in Florida, jet off to Europe, whatever strikes your fancy. In general, you want to participate to get the full employer match—otherwise, it’s like leaving free money on the table.
So bottom line? If your company offers a 401(k) program, don’t think twice about participating in it. The leather recliner and jovial spaniel will be here soon enough. You should be ready to enjoy that stiff bourbon drink. You’ll surely earn it!
Read more of Anna’s Adventures in I’m Cut Off: The Series.