Steer clear of 401(K)? No
Question: I am 26 years old, working at an Energy Service company for 3 years (right after college graduation). I’ve been putting 9% in my 401K with my company matching up to 6%, my current 401K is up to $30,000. I have 2 questions:
1) Am I saving enough? If within 3 years, I’ve only able to save 30,000 that is not even equal to one year of my salary. So when I retire, is that enough? The projected salary that the HR people gave me showed that is save enough, but I don’t see how?
2) Should I even be saving in 401k? What prevent my savings from going under like it did for many people a year ago who has their entire saving goes down the drain when the stock market tank? What other option do I have to protect my saving? Vinh, Shreveport, LA
Answer: First of all, you’re doing really well with your retirement savings. Congratulations on managing to set aside $30,000 in three years.
Secondly, the 401(k) has its flaws, but it’s the bedrock private sector retirement savings plan we have at the moment. You want to participate in it.
It’s a big mistake when an employee doesn’t take advantage of their 401(k). You get a tax break since contributions are made with pretax dollars. Your earnings compound tax deferred until you start cashing in the plan several decades from now.
Better yet, the real investment kick in a 401(k) comes from the employer match. I went to Dinkytown.net and plugged in some simple numbers into one of the retirement calculators. I assumed you had a salary of $40,000; you got a 2% raise a year until you retire at age 65; you earned a 4% average annual return on your 401(k) investments; and the starting point for your plan was $30,000. You had some $739,000 after 39 more years on the job. Yet without the employer match your projected retirement total was $589,000. That’s a significant difference. Of course, these numbers aren’t very realistic but they are indicative.
It’s also important to remember that you shouldn’t put everything into stocks with the 401(k). Put somewhat differently, you should create a well-diversified portfolio so that when some assets zig others will zag. You can focus on more conservative investments, too, that offer less downside risk (and less upside potential). There’s nothing wrong with that.
But I would strongly urge you to continuwe savings for retirement in the 401(k).
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