For much of the 1900’s, pensions, social security and personal savings provided the retirement income for most working Americans. This worked reasonably well for a time.
But there were limitations.
Since the 1970’s there has been concern that Social Security would run out of money. In an effort to keep Social Security viable, there have been multiple tinkerings with the formula including increasing the social security tax rate, taxing higher wages and increasing the retirement age for full social security benefits.
Companies have struggled to pay their pension obligations through the years. Many large and small companies have not been able to maintain the pensions that were due to their retired employees. Several defaulted on pension payments or simply went out of business. In an effort to protect the pensioners, ERISA (Employee Retirement Income Security Act) was established to provide a portion of the lost retirement wages.
Traditionally a man or woman would start in a company fresh out of school and work there until they retired 25-30 years later with a company pension. Now, however, we are a mobile society and most workers will not stay at a job the requisite 25 or more years necessary to receive a pension. Fewer and fewer individuals can count on a pension.
Clearly, we Americans must save for our own retirement.
Among the arsenal of savings vehicles available to us is the 401K.
The 401K became popular in the 1980’s as companies sought to divest themselves of pricey pensions. Workers can now elect to put a portion of our salary into a 401K. Rather than receive this pay, the money would be invested in a limited choice of investment vehicles. Unlike other savings, money placed in a 401K account will not be taxed when it is earned. Rather the full amount will be allowed to grow tax deferred until it is taken out in retirement. In the 401K, we are investing money that would otherwise have been spent on taxes, in effect, money that is borrowed from future tax obligations. And, since most people expect to be in a lower tax bracket when we retire, we will greatly save on taxes when we actually withdraw the money.
Once we elect to place money in a 401K, it is done automatically for us. Before we even receive our paycheck, a portion of our pay is being invested in our own retirement plan. Financial advisors will tell you to pay yourselves first. With the 401K, that is exactly what we are doing.
Start with 1% or 2% of your pay. That is just $1.00 to $2.00 for every $100.00 you receive. Pennies really. Realize that this bit of money is being saved for you and belongs to you. Each year as you get a hoped for pay increase, increase your 401K by one half of your raise. Let your money grow!
I remember years ago when my husband first signed up for his 401K. The amount that he put in wouldn’t even buy groceries for a week for our family of six. I wasn’t sure if this would ever be enough, but he continued his course. It was about seven years later that I looked at his 401K again. He was still investing the same modest amount each month. But, the monthly increase in our investments due to market growth was nearly twice as much as our current contribution. Through the magic of compounding our investments were making huge gains.
Of course, we were riding the roller coaster of the stock market. Some months were better than others. Some years were better than others. But for the long haul, you are reaping the benefits of steady investing. Hey, when the market is down, you are actually getting your stocks and mutual funds at a sale price. You wouldn’t run to the store when they advertise that prices are up. Why wait to buy stocks until they are up?
So start your 401K today. It is a great way to reap the long term benefits of investing.