I'm Too Young for a 401k, Right?

Posted June 28th, 2018

The truth? No way! You are never too young to start investing in your 401k. In fact, the earlier you start, the more you'll earn by retirement. Like, a lot more.

Let's start with the basics. What is a 401k? Basically, a 401k is a retirement plan. I know, retirement seems light years away, but it's important to start saving as soon as you can. Even a small amount each month will add up over time. And by the time you add interest and, possibly, an employer's match, you could be rich! Well, maybe not rich, but you could live without worrying about finances.

The cool part about a 401k is that the money isn't taxed. When the money comes out of your paycheck, it's taken out before taxes. Likewise, you don't have to pay taxes on it while the money sits in your account. While this is helpful when saving, it also deters people from withdrawing early. As soon as the money is taken out, it's taxed. That may seem frustrating, but ideally you shouldn't be using that money for anything but retirement. 

The other exciting part is that part of your 401k is basically like free money! This is all depending on your employer, of course. Most employers match whatever you put in up to a certain amount. If you take advantage of this match, you're already doubling your money FOR FREE!

Have I convinced you to get started yet? Start by talking to your employer about your options and working with your Human Resources department to choose the best one for you. If you really want to get serious about saving, talk to a financial advisor. You are never too young, too broke, or too busy to talk to a financial advisor. A good financial advisor will be able to give you more specific advice based on your age, financial status, goals, etc. In the market for a financial advisor? Try Phil, DECU's resident finance aficionado! We think he's pretty great.

Remember, the savings plan that's best for someone else might not be best for you. While it's best to develop your personal savings plan with a professional, the universal suggestion is to save 15% of your pay. I don't know about you, but as someone who's barely made a dent in her student loans, that percentage scares me! If 15% seems high, professionals suggest starting at 3% and going up by 1% each year until you can comfortably sit at that 15% mark. If possible, however, it is suggested to contribute the maximum amount your employer will match. If you don't, you are basically saying no to free money.

I know what you're thinking by now. "This is my first job. I'm sure I won't retire from here. I mean I'm only 25!" And I totally get it. You probably won't work for the same company from graduation to retirement. That's okay. You have options so you don't lose the money you've invested. Unfortunately, not all options will be available at every business or organization. Your best bet would be to move the money into a rollover account with a mutual fund company (a company that pools together money from multiple sources and invests it all) or a discount broker (someone who invests your money for a small commission, but does not typically offer financial advice). Another choice would be to immediately roll the money into an account with your new company, however that is not always an option. The last option would be withdrawing all the money you've currently saved. While it sounds great to be able to purchase that paddle board you've been wanting, this is not the way to go. Not only do you lose all those retirement savings, but you also have to pay taxes and, in most cases, there is an early withdrawal fee.

So are you sold on this 401k thing? Your future self will thank you! After all, we're all counting down the years to retirement, right? (Only 39 left over here...)

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