401(K) Plans and Millennials - Time is on Your Side

When employers began offering 401(K) plans to their employees in the 1980's, they were meant to be a supplement to pensions and Social Security. Flash forward to 2014, and it's Pension? What's a pension? As for Social Security, unless you're a Baby Boomer getting ready to collect your benefits, it may very well be a case of now you see them, now you don't. 401(K) plans, however, are still going strong and no matter what your age, if your employer offers one, you should be taking advantage of it.The earlier you start, the more you have to gain.

Time is on Your Side

Named after the IRS tax code that governs it, a 401(K) is a vehicle that lowers your taxable income - two times running. You invest a portion of your paycheck before taxes are taken out. So by participating you're lowering your taxable income, and whatever earnings your investment earns remains tax free until you withdraw it at retirement or age 59-1/2. So if you're in your 20's and just starting out, that egg in your retirement nest can be growing for over forty years.

Why Now?

If you're single and starting out, student loads aside, you're never going to have as much "savable" income as you do now. Make it a practice to contribute now and, although you may not have as much to contribute once you have family responsibilities, savings will be a habit hard to break.

The Set-up

Most 401(K) plans offer a variety of mutual funds - bonds, stocks, or money market. It's up to you to choose which suits you best at this stage of life. One particular type, called a will target date fund starts out as equity-aggressive as you can afford at this stage, then mellows with you as the years progress, and gradually switches over to a more conservative, bond-weighted mix as you near retirement. Get in now and be as bullish as you feel comfortable.

Although you set up the account with your employer, an investment management firm like Fidelity or Transamerica will oversee it. Should you wish to realign your investments or have any questions, that is who you will deal with.

The Sweet 3%

What portion of your paycheck you set aside for your 401(K) is up to you but if your employer, like many employers will match your contribution, don't pass it up - contribute! Most companies will meet up to 3% of your yearly salary. Say you make $60,000. That comes to $1800. So while your contributing $1800 a year, $3600 is going into your account. Although it won't be matched, if it's within means to contribute more, do so! It's in your interest. Not to beleaguer the point, but you won't always find it this easy.The IRS does cap yearly contributions. Currently $17,500 is the maximum allowed.

Fluidity- No; Mobility- Yes

One warning is in order - you cannot withdraw any money, no matter what the purpose, before the age of 59-1/2. If you do, you'll find yourself paying taxes on your accumulated earnings plus a 10% penalty. So if you have your sights set on a house or condo, it's best to have a second non-retirement account set aside for that purpose.

This also brings up the question of what happens when you leave your job. Yes, that's when, not if because face it, you're living in a mobile work world where, according to the Bureau of Labor Statistics, the average worker today changes jobs every 4.4 years. You may very well stay at your present job for all of your career but if you don't, don't worry, it's your money and you can take it with you, just not in cash (unless you want to fork over those taxes and 10% penalty).

Roll it over into a Traditional IRA at the fund or bank of your choosing where it can continue to grow tax free until you turn 59-1/2.

Be advised that changing jobs can work against you when it comes to taking advantage of the employer contribution. Most plans have a set amount of years you must stay with the company (vested) before that portion becomes yours. This rightfully protects the employer.

Watch Your $$ Grow

If you are not convinced, ponder this, according to investor.gov if you're were to start a 401(K) at the age of 22 with the $60,000 salary we've used as an example and remain at that wage (which you won't), and commit to a 3% annual contribution, at a conservative return of 5% a year, at the age of 67 you'd retire with 303,633.29 in the 401(K).

And that's without factoring in raises or employer contributions. So what are you waiting for? Run to your company's HR office!