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Most people participate in employer sponsored retirement plans. A large number of employers also offer matching contribution to employee retirement plan. Even though employer sponsored retirement plans remain top choice to save for retirement, many young workers continue to ignore the importace of employer sponsored retirement vehicle.
Retirement planning is usually not the first thing on agenda when you're young and just starting out. However, an early start could make a big difference in the end. Therefore it is important that you review your employer's retirement plan and other saving options available to you. Most employers offer a retirement plan such as 401(K) with some matching contribution. If a 401(k) plan is not offered, there is usually a 403(b) plan that most non profit employers offer. Whatever is the option available to you, you need to make best use of it. Also, if you already participate in a retirement plan, it is important to contribute as much money as you can within the limits set by law.
While some people may have an excuse that you do not have any room to increase your 401(k) contribution, take a look at the following example to see the real picture. For somene who is single and earn $50,000 per year, a mere 2% increase to their retirement account will reduce their take home pay by $23 but will have a significant impact in the long run.
To further explain this, here is a simple example to show how small contribution towards retirement plan can help you save big in long run.
Assumptions:
Annual salary = $50,000
Your contribution = 6% towards your 401(K)
State income taxes = 5% and tax filing status - Single
Based on these numbers, here is how your paycheck will look like.
Final Numbers
In order to compare two scenarios above, let's make some assumptions:
Your Current Age - 25 Years, Retirement Age - 65 Years
Current Annual Income of $ 50,000.00 - increasing 3% per year
Your Employer will match 50% up to 6% of salary - Annually
Annual Interest Rate = 7% - Compounded Annually
Contribute 6% of Salary -Invested Monthly
If you Invested 6% of Your Salary
Final 401(k) Account Balance
$1,361,471.92
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If you Invested 8% of Your Salary
Final 401(k) Account Balance
$1,664,021.23
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