3 Reasons Why Your 401k is So Important

3 Reasons Why Your 401k is So Important March 3, 2014

Saving for retirement comes with a dizzying array of options. Which retirement account should you choose? Which investments within that account do you really need? What if you make the wrong account choice and can’t get a specific investment that you need? With so many options many people find themselves in analysis paralysis. They aren’t sure which the best decision is, so they don’t make any decision at all. This delays their investment of funds for retirement which eventually means their nest egg isn’t as large as it could have been.

Why Your 401k Should Be Your First Retirement Investing Option

In the sea of retirement options your 401k sits like a lighthouse on the shore, guiding you to retirement. Utilizing your 401k is one of the best retirement decisions you can make. Here are three reasons you should be investing in your 401k.

It’s Easy

Sometimes the best investing decision you can make is the easiest one. Your 401k is already associated to your employment, and you have easy access to change your investments, your allocations, and how much money comes out of each of your paychecks to put in your retirement account. You don’t have to think about all of those calculations outside of work – it is all right there in front of you. There’s no need to decide which broker to go with or having to deal with the hassle of setting up automatic withdrawals. It’s all tied to your payroll department, which makes changes a lot easier.

It’s Free Money

A majority of employers that sponsor a 401k retirement plan also offer some sort of matching money for your investments. Matches can be as generous as a dollar for dollar match up to a certain percentage of your salary or as low as a set dollar amount regardless of how much money you save within the plan. No matter how stingy your employer match is, as long as you are getting a match of some kind on the money you save you should put money into your retirement plan. If your plan limits your employer match to a certain dollar amount, try to put at least that much money into the plan before changing to another retirement account. If you don’t get the full employer match offered you are essentially turning down absolutely free money.

It’s Already Setup For You

When you start work your employer hands you a packet of boring but critical information about time off, benefits, and your retirement plan. Many employers now automatically enroll you into the 401k plan into a conservative money market fund at 3% of your pay. You have to read the forms and intentionally opt out if you don’t want to automatically open the account. Employers do this because they know inertia can kill your decision to open an account. You would decide to review your options and “some day” open your 401k. “Some day” turns into years, and your retirement is negatively impacted. If they automatically enroll you at 3% you probably won’t notice the money taken from your check, and at least you will have some progress toward retirement. And just because your employer automatically enrolls you doesn’t mean you shouldn’t change where the money is being invested – companies don’t want to be blamed for market losses so you are usually enrolled into the safest (and thus, lowest return) investment offered within the 401k.

Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Moolanomy, ING Direct, and many others.

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What Are Your Thoughts?leave a comment
  • I agree with you – the 401k / 403b is the best first investment, if you ask me! Who doesn’t love an investment that you don’t have to worry about or track closely?

    • Tim

      It really is an easy way to build your net worth. Kind of like autopilot :)

  • Anytime I can defer taxes, I am on board. Actually, I max out my 403B, IRA and Roth IRA each year.

    • Tim

      The tax breaks are really nice. Retirement accounts are a great way to lower your taxable income. If you can max out the accounts, then you’re really taking advantage of some good tax breaks.

  • Great point. I agree 401K is not only important but also very easy. Also, my company gives free 50% match up to 8% of my contribution. I also recommend everyone to contribute as much as you can to your 401K.

    • Tim

      I always consider a match to be the fastest and best return that you’ll see on your money. Where else can you get a 50% return on your money each paycheck? (No, Las Vegas doesn’t count :) )

  • Deferring taxes, forced savings, and a match. Those are great reasons to happily utilize a 401k! For many people (particularly younger), it’s just a matter of getting past pyschological barriers to just get started.

  • Edith Vaesa

    I have been working for my current employer for over 7 years now and have contributed to a 401K, yet our Employer does not match ANY amount or percentage. What do you recommend.

  • Storewars News

    Nice read! Very informative. Did you know that Nestle opens food safety research centre in Beijing? Full story here: http://goo.gl/vuriQp

  • Thanks for a well-organized article and a good reminder about why it’s so important to have and contribute to a 401K! Good post.

  • That’s an excellent way to put the facts straight. 401(K) is not only important but essential. This fund acts as essential money that looks after us when we are unable to work, especially after retirement. What I have understood about this saving option is that it forces you to save a certain portion of income, which otherwise would have been spent irrationally. Whatever may be the owner’s contribution, 401(k) must be selected by everyone working in companies. This blog definitely makes this essential saving option look lucrative. Thanks for this well written and informative post.

  • I am self-employed and still have not started my retirement savings. Actually as many men as many minds, but there are people advising me IRA savings, the main attraction to me is that you can withdraw money from the accounts if you face some emergency, then you can avoid turning to direct lenders on the web helping to cover your costs. Unfortunately all of us have financial difficulties from time to time and it’s vital to cope with them with as less loss as possible.

  • Really informative article. Read this recently: Tesco to admit to second year of falling profits. Check it here: http://on.fb.me/1qwjEQn