Why Aren’t You Maxing Out Your 401(k)?
by Douglas Bolter Friday, August 22, 2008
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Douglas Bolter is the President and owner of Integrity Financial Advisors, LLC of Wisconsin. He is an Advisor with Harbour Investments, Inc. that offers securities and advisory services and is a member of FINRA and SIPC. Harbour was named 2007 and 2008 Division 1 Broker Dealer of the Year by Investment Advisor Magazine. The award is one of the most prestigious distinctions bestowed upon independent broker dealer firms. In 2009 Doug was voted as one of the top Personal Wealth Managers in the Milwaukee Area that scored highest in the category “Best in Client Satisfaction” in a survey spearheaded by Milwaukee Magazine. As one of the first Certified Retirement Financial Advisors in Southeastern Wisconsin, Doug's depth of experience, knowledge, certification and licensing is a valuable resource for clients that require custom income planning due to job changes, termination, disability, structured settlements or retirement.
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Could it be the best retirement planning tool you have?
Do you have a million dollars? At the moment, maybe not. But if you invest and save diligently and let your assets compound, who knows? You may be a millionaire someday. In fact, you may need to be a millionaire someday. If you stay retired for 20 or 30 years – which could happen – it could take well over $1 million to fund that retirement.1This is the #1 reason many Americans contribute the maximum to their 401(k) plan.
Your 401(k) is your friend. For years, employers have wondered: why don’t people contribute more to their 401(k)s? At the typical large company, the majority of employees contribute too little, and some find it a hassle to even fill out the paperwork. Most people don’t speak “financial” and don’t look at financial magazines or Web sites. It’s “boring.” So they mentally file “401(k)” under “boring.” But the advantages of a 401(k) should not bore you; they should motivate you.
Tax-deferred growth and compounding.
The money in your 401(k) compounds year after year without tax penalties. The earlier you start, the more compounding you get. Let’s say you put $2,400 annually in a 401(k) starting at age 30, and for the sake of example, let’s assume you get an 8% annual return. How much money would you have at 65? You could have a retirement nest egg of $437,148 from putting in $200 per month. But if you started putting in that $200 a month five years later, you might have only $285,588. You can put up to $15,500 into a 401(k) in 2008, and if you are 50 or older, you are allowed up to an additional $5,000 in “catch-up” contributions.
Potential matching contributions.
Who would turn down free money? Big companies will often match an employee’s 401(k) contributions. Usually, the corporate match is 50¢ for each dollar up to 6% of your salary.
Reducing your taxable income.
Many employees don’t recognize this benefit. Your 401(k) contributions are pulled out of your wages before taxes are withheld (pre-tax dollars). So you get reduced taxable income and tax-free growth; you pay taxes on 401(k) assets when you withdraw them from the plan. With the new and increasingly popular Roth 401(k), the contributions are after-tax (no reduction in taxable income), but you can enjoy both tax-free compounding and tax-free withdrawals.
Why not take advantage? If you don’t contribute greatly to your 401(k), 403(b) or 457 plan, you may be ignoring a great retirement savings opportunity.
Douglas Bolter is the President and owner of Integrity Financial Advisors, LLC of Wisconsin. He is an Advisor with Harbour Investments, Inc. that offers securities and advisory services and is a member of FINRA and SIPC. Harbour was named 2007 and 2008 Division 1 Broker Dealer of the Year by Investment Advisor Magazine. The award is one of the most prestigious distinctions bestowed upon independent broker dealer firms. In 2009 Doug was voted as one of the top Personal Wealth Managers in the Milwaukee Area that scored highest in the category “Best in Client Satisfaction” in a survey spearheaded by Milwaukee Magazine. As one of the first Certified Retirement Financial Advisors in Southeastern Wisconsin, Doug's depth of experience, knowledge, certification and licensing is a valuable resource for clients that require custom income planning due to job changes, termination, disability, structured settlements or retirement.
Do you have a million dollars? At the moment, maybe not. But if you invest and save diligently and let your assets compound, who knows? You may be a millionaire someday. In fact, you may need to be a millionaire someday. If you stay retired for 20 or 30 years – which could happen – it could take well over $1 million to fund that retirement.1This is the #1 reason many Americans contribute the maximum to their 401(k) plan.
Your 401(k) is your friend. For years, employers have wondered: why don’t people contribute more to their 401(k)s? At the typical large company, the majority of employees contribute too little, and some find it a hassle to even fill out the paperwork. Most people don’t speak “financial” and don’t look at financial magazines or Web sites. It’s “boring.” So they mentally file “401(k)” under “boring.” But the advantages of a 401(k) should not bore you; they should motivate you.
Tax-deferred growth and compounding.
The money in your 401(k) compounds year after year without tax penalties. The earlier you start, the more compounding you get. Let’s say you put $2,400 annually in a 401(k) starting at age 30, and for the sake of example, let’s assume you get an 8% annual return. How much money would you have at 65? You could have a retirement nest egg of $437,148 from putting in $200 per month. But if you started putting in that $200 a month five years later, you might have only $285,588. You can put up to $15,500 into a 401(k) in 2008, and if you are 50 or older, you are allowed up to an additional $5,000 in “catch-up” contributions.
Potential matching contributions.
Who would turn down free money? Big companies will often match an employee’s 401(k) contributions. Usually, the corporate match is 50¢ for each dollar up to 6% of your salary.
Reducing your taxable income.
Many employees don’t recognize this benefit. Your 401(k) contributions are pulled out of your wages before taxes are withheld (pre-tax dollars). So you get reduced taxable income and tax-free growth; you pay taxes on 401(k) assets when you withdraw them from the plan. With the new and increasingly popular Roth 401(k), the contributions are after-tax (no reduction in taxable income), but you can enjoy both tax-free compounding and tax-free withdrawals.
Why not take advantage? If you don’t contribute greatly to your 401(k), 403(b) or 457 plan, you may be ignoring a great retirement savings opportunity.
Douglas Bolter is the President and owner of Integrity Financial Advisors, LLC of Wisconsin. He is an Advisor with Harbour Investments, Inc. that offers securities and advisory services and is a member of FINRA and SIPC. Harbour was named 2007 and 2008 Division 1 Broker Dealer of the Year by Investment Advisor Magazine. The award is one of the most prestigious distinctions bestowed upon independent broker dealer firms. In 2009 Doug was voted as one of the top Personal Wealth Managers in the Milwaukee Area that scored highest in the category “Best in Client Satisfaction” in a survey spearheaded by Milwaukee Magazine. As one of the first Certified Retirement Financial Advisors in Southeastern Wisconsin, Doug's depth of experience, knowledge, certification and licensing is a valuable resource for clients that require custom income planning due to job changes, termination, disability, structured settlements or retirement.