Saving for Retirement: Why You Should Always Max out Your 401(k)


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Saving for retirement doesn’t have to be difficult. The problem for most people is simply that they put it off – they wait way too long to begin saving, and they suffer as a result. One of the easiest and cheapest ways to make sure you’ve got enough money to actually be able to retire and not end up as a greeter at Wal-Mart to make ends meet is to max out your 401(k) every month.

All you need to do is elect to contribute the maximum that your company’s plan allows as a percentage of your income. This will usually be roughly in the 10% range, but it can vary depending on how much you make.

Why should you max it out? First, it won’t make as much difference in your take home pay as you think. Contributions are not taxed, so you’ll be paying significantly less in your withholding. Second, it’s free money – the money you save in taxes is money that you are throwing away.

It’s like an immediate 25%-30% return on your money just by putting it into the account. Why would you give that up? It usually takes three years or so in the stock market to make that much, so it’s pointless to throw away an immediate gain. Also, many companies will match your contribution, making it even more worthwhile. Finally, it’s a good idea for many people who don’t have the discipline to save otherwise. If you spend your money as you get it, it’s better just to keep yourself from getting it in the first place. Once it goes in that account, just make sure it stays there – there are significant penalties for early withdrawal.

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