Yes, there is a holiday for everything!!! (BTW, is there one for ice cream?) This article from Bankrate introduced me to 401k day (maybe you already knew it existed). At least they make me feel better the way the piece starts off:
You may not have heard about it, but the day after Labor Day is another important event -- 401(k) Day. It's largely a symbolic holiday that can take place any time of the year, designed by the financial industry to raise our consciousness about retirement savings. In preparation for this event, the Profit Sharing/401(k) Council of America, or PSCA, created a superhero action figure -- Captain 401(k) -- whose mission is to combat his arch nemesis, the savings procrastinator.
Ohhhhhhhhh! I LOVE super heroes!!! (I have a copy of "401k Man" at the start of this post -- click on the picture to enlarge it) But isn't this a bit overboard?
Anyway, the "day" has some good points about it including emphasizing the following:
Too young? Too old? You've already saved up a tidy sum? You've saved absolutely nothing? You have too many bills? You know nothing about investing?
None of these are good reasons to forgo contributing to your company's 401(k) plan if you're lucky enough to work for a company that offers one.
If you're already maximizing your 401(k) plan or another type of defined contribution plan at your workplace, then you understand the importance of saving for retirement. But if you've put off a decision about enrolling in a 401(k), a 403(b) for nonprofit workers, or a 457 plan for government workers, then listen up: It doesn't matter what your circumstances are. You must conquer inertia and sign up for your company's retirement plan at your next opportunity.
Why is this so important? Because the days of working for the same employer for 30-odd years and getting rewarded at the end of that time with a retirement pension are history. Only 20 percent of the private sector workforce has access to a traditional pension plan, and not all of them will get the payout they've been promised. These "defined benefit" plans require a lot of funding by employers, which explains why some are filing bankruptcy to avoid funding them further. And it's not only the airlines that are affected. American businesses reported a "record shortfall of $353.7 billion in their latest filings" about their underfunded pensions with the Pension Benefit Guaranty Corp.
Social Security, the one leg of the three-legged retirement footstool that we could always depend on, is wobbly right now. Some academics believe the fiscal imbalances caused by Social Security and Medicare combined threaten to throw our country into bankruptcy. Congress has spent the better part of this year debating how to make Social Security fiscally solvent and palatable to the American public. We don't know what the final outcome of this debate will be, but chances are good that benefits will get cut and taxes will increase. So while you may get some type of Social Security stipend during your old age, don't count on it to pay all your bills.
The piece then talks a bit about IRAs before talking about the advantages of 401ks. I've posted about that before (here and here), so I'll skip it this time. However, they end with an example that's worth including:
The younger you are when you start packing money into these plans, the better off you'll be at retirement. Never mind about the student loan you're paying off or the mortgage down payment you're trying to save for. You'll be way ahead of the game if you start putting money into your 401(k) plan at age 25 as opposed to waiting until age 35, when the reality of retirement first begins to dawn on many people.
How far ahead? Let's say at age 25 you start saving $300 a month for 10 years and earn an average return of 8 percent over that time. At age 35, your nest egg will have grown to $54,884. Now, if you stop investing in a 401(k) plan altogether and just leave that amount to grow until you reach age 65, your nest egg will grow to $552,279 (again assuming an 8 percent annualized return over that time).
But if you wait until you're age 35 to begin investing $300 a month, you'll have to invest that amount for 30 years until, at age 65, you'll have saved $447,108, assuming the same rate of return.
The difference: The total amount the 25-year-old invests in the plan is $36,000 ($300 x 120), vs. $108,000 for the procrastinator ($300 x 360).
OK, this example may not completely reflect reality. After all, returns fluctuate a lot, and the amount you invest will vary through the years, depending on your circumstances. You may end up having to wait an entire year before you can even join a new employer's 401(k) plan. Roughly 25 percent of employers make you wait a year or longer. But the example reveals the big difference that 10 years can make to improve your chances of attaining a savings goal. It can determine whether you will enjoy a sumptuous or a meager standard of living when you cross the finish line into retirement.
Good stuff overall. Again, the 401k is one of God's gifts to our financial futures. And now that it has its own super hero, it's cool too. ;-)
Something readers may want to consider (which also may make for a good front page topic on FMF) is contributing extra early. If you are fastidious enough to put away the full 14k (changes to 15k in 2006, I believe) why space it out over the full 12 months? Pay it earlier and you will reap the following benefits:
* It is done. One less thing to have on your plate.
* If you anticipate a job change there could be a waiting period to enroll with the new employer. Getting it out of the way sooner reduces the odds that you won't be able to do full contributions.
* The funds get just a little bit more time to mature and compound.
* It frees up money at the end of year when holidays can exert extra costs.
Naturally, this advice only applies for people who intend to pay the full amount anyhow, and who have positive cash flow, but it is something worth considering.
Posted by: Duane Gran | September 22, 2005 at 01:58 PM