Investing, Personal Finance, Retirement 
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1.1 Million Reasons To Participate in a 401(k)

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I was reading CNN Money’s Five Mistakes when it comes to 401(k)s and Mistake 2: Not Contributing Enough into your 401(k) plan, a chart was displayed that really opened my eyes (and should open yours, especially if you’re not participating in your 401k).

Here are the assumptions of the chart:

  • You are making $60,000 now.
  • You get a 3% annual raise.
  • You get a 50% match.
  • 8% annual return on your investment.

If you contribute 3%, after 30 years you’ll have $429k in that account. If you contribute 6%, after 30 years you’ll have $858k in that account. If you contribute 9%, after 30 years you’ll have $1.1 million dollars in that account.

Contribute in your 401(k) and contribute as much as you can afford. (This is where all you 401k haters chime in about how they’re not worth it…)

{ 8 comments, please add your thoughts now! }

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8 Responses to “1.1 Million Reasons To Participate in a 401(k)”

  1. Jeremy says:

    There really is no reason people shouldn’t contribute to their employer sponsored retirement plan. Ok, I guess if they didn’t offer a match and only provided a few fund choices with high fees and poor returns, you may have an argument. Otherwise, with the 15k limit in 2006, and generally some sort of match as well as usually offering institutional funds and/or a guaranteed fund, it doesn’t make sense to dump as many pre-tax dollars as you can afford to into it.

    But especially if they offer a match, that is usually a 50 or 100% return on your initial money. Anyone who turns that down has some issues.

  2. Jeremy says:

    Oops, I meant to say, “it doesn’t make sense NOT to dump as many…”

  3. Ben says:

    I’ve been contributing the maximum to my 401k for 7 years now but after recently reading a 2001 report by Gokhale, Kotlikoff, and Neumann I need to give it a little more thought.

    Obviously I still want to invest the same amount of money but perhaps less in the 401k and more in other accounts. Give the report a read, it contains a lot of information but you can get through the Abstract and Summary pretty quick.

  4. Foobarista says:

    Ben’s link appears to not count an employer match. But my take is the greatest crime with 401K plans is that it’s quite expensive for small companies to get decent plans. Vanguard and Fidelity won’t talk to you unless your company has $1M in its 401K universe, which pretty much rules out small, young companies. 401K providers which work with small companies make money in the same way that stockbrokers do: from commissions from selling expensive funds.

    The government could help enormously by reducing the paperwork around 401Ks and to introduce a truly employee-managed, portable 401K that wasn’t tied to a particular employer.

  5. Weekly Roundup – 11/10/06

    Here’s a quick rundown of some finance-related posts that caught my eye over the past week:

    Jim presents 1.1 million reasons to participate in a 401(k).
    Flexo reminds us that it’s open enrollment season with a post about his 2007 benefits…

  6. Joe Taylor says:

    Always take all the money a company will give you by contributing at least to the match max.

    From there I would suggest any extra savings be used to fund a Roth IRA to generate tax free income in retirement. Participating in a 401k does not take away your ability to fund a Roth IRA. If you are singlr and your modified adjusted gross income is less than $110,000 or married with joint MAGI of less than $150,000 you can contribute $4,000 under age 50 and $5,000 age 50 and over.

    A Roth also gives you flexability – after five years you can withdraw any contribution tax and penalty free. But better yet let it continue to compound, How much tax free income would that $1,100,000 generate?

  7. Steven James says:

    HeyBen,

    That was a booster for me !! I’ve been investing maximum in 401K and it promises great returns for the future.

    I hope it works for me as well.

    Regards,

    Steven

  8. Matt says:

    It’d be nice if I could roll over the money from 401k contributions immediately into a real IRA. That way I could get the matching and still be able to invest the money in negligible-fee index funds instead of watching all my paper gains get eaten up by fund managers.

    But if you get matching, you’re still better off with the 401k, as long as you roll it over into better investments when you switch jobs. Frankly if you stay at one employer longer than the vesting period on your 401k match, you’re throwing your career away anyhow, so it’s not like a smart employee is going to lose much money in fees, if he’s careful.


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