Saving for retirement is a lot like going to the dentist.
We all know we should do it, but its easy to procrastinate because its painful and boring.
As intimidating as investing is, a401(k) is a great start and a great savings motivator.
401(k)s are far from perfect, though.
Thats free money, so you want to take as much of it as you’re free to.
In other words, you want to save enough to maximize the match.
Firms like Vanguard and Fidelity charge less than 0.10% for many of their investments.
But a measly percent?
Thats nothing, you might say.
Whats the big deal, cheapskate?
Its a small percentage.
Over time, though, 1.5% can add up to a substantial amount.
Lets say you invest $100,000 and, over 20 years, you get a return of seven percent.
With a 1.5% fee, youll net $291,000.
But with a fee of only 0.10%, that same investment is $379,799.
Thats a $88,000+ difference.
you’re free to usethis investment fee calculatorto compare expense ratios.
This isnt to say you shouldnt invest in your 401(k) at all.
Again, you want to save enough to get the match.
After all, free money is still an awesome deal, even with the fees.
This way, you’ve got the option to buy cheaper investments.
Thats not always the case with investments.
Theres also the matter of diversity of fund and investment types.
As Investopedia explains, theyre designedto be simple, not diverse.
If it doesnt, you’re free to use an IRA tobuy the investments you need.
Companies that offer employer matches often pay lower salaries, according todata from the Center for Retirement Research.
This is especially true for higher income workers (the top 40% of the income distribution.)
These results support the notion that the fringe benefit/wage tradeoff can vary for workers at different income levels.
For high-income workers, additional 401(k) contributions are almost fully offset by lower wages.
Employers dont just invest all of your money at once.
They sit on it and spread out the benefit over the years, up to six years total.
This generally means you could deduct the amount you save from your income taxes.
In other words, youll pay fewer taxes now, which is great if you oughta save money now.
Other retirement plans, namely the Roth IRA, dont offer this advantage.
The money you earn on your investment grows tax-free.
Its a pretty good deal, andmost experts recommend the Rothfor tax-free growth.
With a 401(k), you have a tax advantage, but its usually the tax-deferred option.
Again, 401(ks) are useful for jumpstarting retirement savings.
They motivate a lot of people who otherwise wouldnt think about investing to start saving for their future.
They also make it easy to invest.
Theres a trade-off for that simplicity, though.
When you know what youre dealing with, you know how to work around its drawbacks and limitations.
Illustration by Sam Woolley.
Photos:Pixabay,Unsplash,energepic.com,Kaboompics
