Although the 401(k) has been around for almost four decades, the participation rate is still far lower than it should be. According to the Bureau of Labor Statistics, just over half of eligible workers participate in their 401(k) plans, and a large percentage of them make only a small contribution.
If you are one of nearly half of American workers who do not currently benefit from a 401(k) plan, you might want to take a step back and consider the many benefits of these retirement plans. From the next page, you’ll discover 10 reasons why you should invest in your company’s 401(k) plan.
1. Free money
Many employers offer the ultimate lure for workers participating in the company’s 401(k) plan. Whether they put 50 cents on the dollar or provide a dollar for a dollar, that’s free money, and there’s no reason to reject it.
Getting started with investment is difficult, but it couldn’t be easier to sign up for the 401(k) plan. Many employers automatically include new hires in the company’s 401(k) plan, which is the ultimate simplicity. Even companies that do not offer automatic enrolment usually make it easy for their employees to start planning their pensions.
3. Automatic escalation
When you start investing, you ma
y only be able to deposit 1% or 2% of your paycheck, but automatic escalation gives you the opportunity to increase the savings. You only need to log in once, and the plan manager will take care of the rest.
Diversifying your investments is important, and 401(k) plans provide an easy way to invest in a variety of financial instruments. From pension funds and growth values to goal-oriented pension plans, the typical 401(k) plan offers everything from a single source.
5. Tax savings
The money you invest in your company’s 401(k) plan is deducted from your taxable income, so you can save money now while putting money back for the future. The tax savings can be quite considerable, which gives you another reason to save.
Having the discipline to save can be tough, especially when so many things are vying for your money. Investing in a 401(k) plan is a great way to build financial discipline, and that will serve you well for the rest of your life.
7. High contribution limits
Compared to many other types of pension funds, 401(k) plans have very high contribution limits, so you can put an extraordinary amount of money aside. For 2017, the maximum 401(k) contribution is a generous 18,000 dollars, plus a catch-up contribution of an additional 6,000 dollars for employees aged 50 and over.
8. Dollar-cost averaging
If you deposit money into your 401(k) plan with each paycheck, you benefit from the dollar-cost average calculation, one of the most important concepts in the financial world. The dollar-cost average calculation means that you accumulate more stocks when the market is on the ground, and less when it is at the top end, which embodies the concept of “buy low, sell high”.
9. Provisions for loans
While taking out a loan from your 401(k) should always be the last resort, the availability of this provision can be life-saving in certain circumstances. When you repay your 401(k) loan, you pay for it yourself, minimizing the impact of borrowing.