What do you need to know about 401k investing

You may have heard about it, and your company may offer it, but do you really know what a 401(k) actually is and what you need to do with it? In order to make sure you understand a 401(k), this article will go over the basics so that you know why it is important for your retirement!

What is a 401(k)?

A 401(k) is a type of investment that is sponsored by employers and is designed to help their employees save for their retirement on a tax-deferred basis. 401(k) plans allow employees to decide whether or not they want to defer a portion of their pay towards this investment account and also allows employers to make contributions (the size of these contributions varies on what the employer allows) on behalf of their employees. When money is invested into a 401(k) account it can increase on a tax-deferred basis and allow employees to maximize their long-term benefits of an investment where interest is calculated on the initial amount put in as well as accumulated. Now that we have the definition, why does it make sense for employees to utilize a company's 401(k) plan?

There are numerous reasons as to why a person should utilize a 401(k) plan however the top 3 are:

1- Compound Growth: The definition of compound growth is the specific term used for the geometric progression ratio that provides a constant rate of return over a specific time period. Now, how does this relate with 401(k)? Well, let's say that every year you contribute $10,000 for 20 years (totaling $200,000 overall) and that your investments earn the stock market's historical average rate of return which is 7%. That means that overall, your account would be worth roughly $500,000!

2- Employer Contributions: When an employer opts to match contributions, that is basically money they are just giving their employee. However, not all employers match the same amount. They can either do dollar-for-dollar or at a set percentage (usually 50%). Regardless of what the employer wants to contribute, it is free money that adds up over time. If you put in $1000 one year and your company matches that at 50% you would now have $1500 in your account that would also yield a higher rate of return due to compound growth!

3- Simplicity: Besides the fiscal benefits of having a 401(k) account, the simplicity is a nice bonus. A 401(k) is a pretty easy way to invest. Once you set everything up, there is very little maintenance that is required. Not only that, but 401(k) plans usually have investment professionals who would provide complementary retirement planning advice to people looking into this type of account.

Overall, even though 401(k) accounts seem daunting, they are relatively easy to get into and make your retirement life easier later on down the road! Make sure you take advantage of this if it is offered by your employer! You don’t want to face retirement with little to no money and not be able to work. This account makes sure you’re set so that when you are ready to retire, you can do so care-free!