Why is this a great thing? For starters, your tax bill goes down. Then, if your money is in stock mutual funds, assuming the market does well over the long term, your investments grow on a tax free basis. And here's the beautiful thing: Let's say your employer matches your contribution up to 3%. That means if you put 3% of your salary into the account, your employer puts in another 3%. Yes, a 100% return on your investment during the first year. Not bad.
"But putting 3% (or whatever amount) into my 401K plan is like taking a pay cut!" Yes, it is. However, you can start small. Maybe increase your contribution by 1% a year, until you hit the limit. Those increases may not be very painful, especially since they are "before tax" contributions and since the increases will happen over such a long period.
The current limit for annual 401k contributions is 17,000, but the limit rises to 23,000 if you are 50 or older.
Your 401k, 403b or other tax-deferred retirement account may wind up making up the bulk of your next-egg when it becomes time to retire.If your employer does not have a retirement plan, you can start your own, with an IRA account at a bank, a mutual fund company, or with a broker. Speak to a financial professional and find out what your options are. If you open an IRA at a bank and the money goes into a CD account, you won't earn much with interest rates so low. Mutual funds may be the best way to go. Do you build equity in your home? This has been a traditional way to build wealth over time, but of course it's just one piece of the puzzle. If you are renting, you cannot build up equity. But maybe you can save up enough to put together a down payment and purchase a home. Will it be worth it? Possibly, but you can't even make that decision until you save up a down payment. Then you will need to look at loan options and figure out whether or not it makes sense financially to buy. Do you expect to pay off all mortgage loans before retirement? "You'll always have a house payment and you'll always have a car payment." A veteran banker once said this to me. But it doesn't have to be that way. If and when you are ready to buy a home, don't limit yourself to considering a 30-year mortgage loan. A 15-year loan will have a lower interest rate, and you will build up equity much faster. Depending on the scenario, you may find that you can afford the 15-year loan, with the end result being huge savings on interest, as well as gaining piece of mind by paying off the loan so much earlier. An example of this, comparing 30-year and 15-year fixed-rate loans at last week's national average interest rates is included in Buying a Home? Now May Be the Best Time.
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