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Why Aren't You Maxing Out Your 401(k)? - Retirement Planning

Posted by Josh Patrick

ClarityThis is a guest blog entry by Peter Montoya, one of the better minds in the investment business.  I hope you enjoy his comments.

Do you have a million dollars? At the moment, probably not. But if you invest and save diligently and let your assets compound, who knows? You may be a millionaire someday. In fact, you may need to be a millionaire someday. If you stay retired for 20 or 30 years – which could happen – it could take well over $1 million to fund that retirement. In fact, a recent study of Registered Investment Advisors recommended retirement assets of $1.5 million or more for baby boomers.1 This is why you should contribute the maximum to your 401(k) plan.

Your 401(k) is your friend. For years, employers have wondered: why don’t people contribute more to their 401(k)s? At the typical large company, the majority of employees contribute too little, and some find it a hassle to even fill out the paperwork. Most people don’t speak “financial” and don’t look at financial magazines or websites. It’s “boring.” So they mentally file “401(k)” under “boring.” But the advantages of a 401(k) should not bore you; they should motivate you.

Tax-deferred growth and compounding. The money in your 401(k) compounds year after year without tax penalties. The earlier you start, the more compounding you get. Let’s say you put $2,400 annually in a 401(k) starting at age 30, and for the sake of example, let’s assume you get an 8% annual return. How much money would you have at 65? You would have a retirement nest egg of $437,148 from putting in $200 per month. But if you started putting in that $200 a month five years later, you would have only $285,588. You can put up to $16,500 into a 401(k) in 2010, and if you are 50 or older, you are allowed up to an additional $5,000 in “catch-up” contributions.3 These amounts are indexed to inflation, so they may stay the same for 2011.

Potential matching contributions. Who would turn down free money? Big companies will often match an employee’s 401(k) contributions. Usually, the corporate match is 50¢ for each dollar up to 6% of your salary.3

Reducing your taxable income. Many employees don’t recognize this benefit. Your 401(k) contributions are pulled out of your wages before taxes are withheld (pre-tax dollars). So you get reduced taxable income and tax-free growth; you pay taxes on 401(k) assets when you withdraw them from the plan. With the new and increasingly popular Roth 401(k), the contributions are after-tax (no reduction in taxable income), but you can enjoy both tax-free compounding and tax-free withdrawals.

Why not take advantage? If you don’t contribute greatly to your 401(k), 403(b) or 457 plan, you are ignoring a great retirement savings opportunity. Talk to your financial advisor about your 401(k) and other great resources to save for retirement.

Josh Patrick

We have a video we would invite you to watch on the investment environment.  It’s called Rowing and Sailing and we think you’ll get some real value in this short program.  Click on the button below which will take you to the video sign up page.

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This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional.

 

 

Citations.

1 - financial-planning.com/news/Garrett-retirement-scottrade-2665994-1.html [3/1/10]

2 - irs.gov/retirement/article/0,,id=96461,00.html [6/30/10]

3 - money.cnn.com/magazines/moneymag/money101/lesson23/ [10/22/10]

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: retirement planning, retirement, financial planning, financial independence planning

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