401ks – Your advantageous tool for retirement

An easy guide on how 401ks work and why they are important.

It’s very easy for the finance industry to use jargon that is boring and hard to understand. Because, let’s face it, finance can be very boring. It’s a lot more fun to listen to or read about a murder mystery, or why the ancient Egyptians worked with aliens to build the pyramids. But even though it’s boring, its extremely important, and I do my best to make it easy to understand. We can’t, and don’t, want to work our entire lives, which means when you make it to 60 years old, you may be miserable if you only rely on the government for a paycheck. That’s why it’s important to prepare for retirement, and a 401k can be the easiest way to do just that.

When you first get started working at a new company, there’s a good chance you’ll have to wait a full year before getting started with the company’s 401k. But after that, your company should offer a traditional 401k and a Roth 401k. The difference has to do with the tax advantages for both. The traditional 401k is simple; you don’t pay taxes now on the income you contribute to the plan, but will when you take the money out. The Roth 401k, you pay taxes now, but receive income from the plan tax free when you take it out during retirement. There’s no right or wrong answer here, just pick which one you feel best about. Personally, I take advantage of both.

Your company should also offer some sort of matching program, which will only be available for a traditional 401k. So if you only have a Roth 401k, understand that they will only match your contribution and add that money to a traditional 401k account, not your Roth. You’ll then end up having both.

When I worked for Wells Fargo, they matched 3%. Which means if I contribute 10% of my paycheck to my 401k, they will kick in their 3% along with my 10%, and I would have a total of 13% contributed each paycheck to my retirement machine. Sometimes companies have a tricky matching systems. For example, maybe they match 100% of the first 3% and then 50% for the next 3%. All that means is if you contribute 10% like I did, you’ll end up with a total of 14.5% contributed. A full 100% of the first 3%, and then just 50% of the next 3%, will equal just 1.5% of the last set of contributions.

The last part of the 401k that tends to be the most daunting is picking the funds in which to invest. Fortunately, as your advisor, I can help with this. Together we can weigh your retirement goals, your risk tolerance, and your asset allocation strategy (how much equity to bonds you want to own.) This is very important, because it has to do with the performance of your account and how much your potential gain and loss would be during a bull or bear market. Send me an email and I can help answer any questions.

Don’t miss the opportunity your company gives you and wait to start investing for retirement. If they are offering matching, think of it as a raise. Its just a raise you receive when you retire instead of now. Time in the market is more important than timing the market; guessing when to buy and sell your investments for retirement is a fool’s game. There will come a day when you’re between the ages of 60 to 65 years old and you’ll be just as wishful as you are now to have money to travel and buy the things you need. Don’t wait, start preparing, and those years will be easier with money in your pocket.

Thank you,

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Any opinions are those of Andrew M. B. Kritikos and not necessarily those of Raymond James.401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.