Two weeks ago, my blog talked about different retirement accounts. This week, I want to talk about the importance of participating in your employer’s 401(k) or 403(b) plan. For simplicity, I will just use the term 401(k) but most of the concepts apply to 403(b) plans, which are used by non-profits and educational entities.

When asked why they don’t participate in their employer’s 401(k) plan, employees give the following reasons. Of course, there are others but these are the most often mentioned.

  • I’m young. I have plenty of time to worry about saving for retirement.
  • I can’t afford it.
  • I only work part-time.
  • I may not be working here that long so there’s no sense in participating.

Here’s my counter to each of these reasons plus one more.

100% return on your investment

If your employer offers a match, any money you put into the retirement plan up to the amount of the match, your employer will put the same amount into your 401(k). For example, if your employer matches up to 3% of your wage of $500 per week and you choose to put 3% into your 401(k) account, you will put $15 into the account each pay period. With the match, your employer will also put in $15. Your $15 investment just doubled to $30 and you have an immediate 100% return. Any time you don’t put in the 3%, you are losing the opportunity for a 100% return.

I’m young. I have plenty of time to worry about saving for retirement.

When you are young, it feels like it will be a long time before you will be looking at retirement. Yet, before you know it, you are 50 and retirement is very close. If you keep putting off saving for that retirement, you will start to panic about age 50 and will realize you should have started a long time ago. On the other hand if you start investing in your retirement account as soon as you are eligible, you will be shocked at how much money you have accumulated by the time you are ready to retire.

Here’s a simplified example:

  • You start working at age 25 making $35,000 per year.
  • You take advantage of your employer’s 3% match.
  • You retire at age 65.
  • You never get a raise.
  • Your return on your retirement account averages 6% per year over the 40 years.
  • You get paid twice a month.
  • At age 65, you will have invested $42,000 and your balance in your account will be $349,657.

If you wait to start investing until age 50 and all the other factors are the same, you will invest $15,750 over the 15 years until you retire and you will have $50,989 in your retirement account at age 65. By starting early, you will have almost $300,000 more for retirement. Starting young makes a difference!

I can’t afford it.

This is a legitimate issue for many folks. Yet if you aren’t taking advantage of at least your employer’s match, you are throwing away 100% return. In addition, any dollars you put into your retirement account are not taxed in the current year.

If you make $35,000 a year and you put $1,000 of that into your retirement account, your taxable income is now $34,000. Let’s assume your federal tax rate is 15% and your state tax rate is 5%. If you didn’t put any money into your retirement account, you would pay $7,000 in federal and state income taxes. By putting $1,000 into your retirement account, your taxes will be $6,800, a reduction of $200. So, that $1,000 contribution to your retirement account really only cost you $800. That’s about $15 a week. Can you afford that?

I only work part-time.

Some employers don’t allow part-time workers to participate in their retirement plans. But if yours does, take advantage of it, particularly if they match your contributions. You don’t want to lose that 100% return!

I may not be working here that long so there’s no sense in participating.

Some people think if they leave their job, their 401(k) stays with their old employer. You can certainly do this if you want. It’s still your account and you are in control, subject to the rules of the retirement plan. In almost every case, though, you can roll your 401(k) account over from one employer to the next. Alternatively, you can roll your 401(k) into your Individual Retirement Arrangement (IRA).

Cautionary note

Never, ever, take a distribution from your 401(k) account until you are ready to retire. Always have it rolled over into another retirement account if you need to move it. If you take the distribution and you are not 59½, you will not only have to pay the income tax on the distribution you will also have to pay a 10% penalty.

In addition, do not be tempted to take a loan against your 401(k). While the loan is not subject to taxes or the penalty (when used for allowed expenditures), if you leave the employer before the loan is paid back, your loan is reclassified as a distribution and you are now subject to income taxes and the 10% penalty. Not a pleasant hit particularly if you were laid off, let go, or became disabled.

Please be advised that the information contained herein is not intended to be used, nor can it be used, for the avoidance of tax penalty that the taxing authorities might assess related to this matter. 



Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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