Do new college grads really need to participate in a 401K Retirement Savings Plan? Yes! https://lnkd.in/eMvp94gB
I spend around 15-30 minutes on this in class because my students need it. When they get their job offers, I ask them to look over this part (they usually need help).
Please watch this if you want career mobility & financial independence in your 40s & beyond. In order to achieve this, you will need to invest heavily in your 20s & 30s.
If you put $20,000 a year into your 401K, it is tax deferred. Do you understand what that means? For example, if you did not put it into your 401K & wanted to take it home, the government would keep around $6,000 in taxes. That means your take home would only be $14,000. So, you made around 30% right away if you put the $20K into your 401K (rather than taking the money home). Is there another investment out there that can get you a 30% return that fast? No, not legally (in general). Even your student loan debt will not charge you 30% (or at least I hope not).
I get it, you want to live large after graduation & you might only be starting out at $70K as it is (so who wants to sock away 20K a year right away),…but, I would at least put in what your employer will match dollar for dollar.
Let’s say your company will put $6K of its cash in your 401K (but only if you put $6K of your own). Some people might actually say no thank you and not put in 6K of their own money. However, you are saying no to an extra $6K that your employer wants to give you. Also, by putting 6K of your own in, the government will not take $1800 of it in taxes (if you take it home). So, with your 6K investment, you make an extra $7,800 right away on a 6K investment, that is over 100% ROI. Also, that 12K total a year could be worth $1-2M by the time you are 40. Just the interest on 2M could be over 60K a year.
So, I would at least put in what your employer will match dollar for dollar, but way more if you want career mobility and financial independence in your 40s and beyond. In order to achieve this, you will need to invest heavily in your 20s and 30s.
ONE CAVEAT: YOU CANNOT TOUCH THIS MONEY UNTIL YOU ARE 59.5 YEARS OLD (which seems like death to a 22 year old, but it’s not, in general)
A good quick read for college grads:
https://lnkd.in/eU2Stxq8
First, and I believe that this is the most important reason, is the “forced savings” that a 401(k) provides. Most young people are not great savers and tend to confuse their wants with their needs.
The second benefit of the 401(k) is the “company match.” It’s fairly common for employers to kick in fifty cents (or even a dollar) for every dollar saved in a 401(k). The rate of the match varies, but it can be up to the first 6% of savings.
The third benefit of 401(k) participation is the tax advantages. Whether you use a traditional, pre-tax 401(k), or the Roth, the money inside the plan grows tax-deferred.