Many people assume retirement planning can wait until their 40s or 50s. In reality, the earlier you start saving, the more powerful compound growth becomes. Small contributions today can completely change the trajectory of your retirement.
Getting Started
When someone asks me for advice on how to start investing their money, the first thing I typically ask is if their employer offers a 401(k) plan. Other similar plans are 457 plans, 403(b) plans, and the Thrift Savings Plan (TSP). For anyone who has access to one of these plans and does not utilize it, I believe they are making a mistake for several reasons. The first reason is that most employers provide a match.
Example:
Kylie works for a small business that offers a 401(k) plan with a 3% match. She makes $100,000 per year and contributes 10%. Her contributions for one year are $10,000. The company matches 3%, which adds an additional $3,000 per year to the 401(k) plan. The $3,000 contribution is essentially free money that many people miss out on because they do not contribute to the 401(k).
Some companies provide the match regardless of whether the employee contributes, but that is not the case for every plan. Many plans require employees to contribute at least the match percentage to receive the full 3% from the employer. Since Kylie is adding 10%, she enjoys the full match every year.
The next major advantage is the tax treatment. Kylie contributes to a traditional 401(k), which means her contributions are made pre-tax. She gets a tax benefit for contributing $10,000 to the plan. After her contributions, her adjusted gross income (before deductions) is $90,000. For those that do not need the immediate tax benefit, I would encourage contributing to the Roth 401(k) instead. With the Roth option, taxes are paid now and withdrawals can be taken tax-free after age 59 ½.
I also encourage people to contribute to these plans for psychological reasons. I have noticed that most people do not want to touch their retirement accounts unless there is an emergency. It is less tempting to tap into a 401(k) when there is a 10% early withdrawal penalty looming.
Avoid Emotional Decisions
I would say it is relatively normal to contribute to a retirement plan for 30-40 years. If you are going to be doing something for that long, it should be done the right way.
First and foremost, it is important to make sure the investments in the plan align with long-term goals. If someone is in their mid-30s and invested strictly in conservative bond funds, I believe they are leaving money on the table. For the most part, there will not be someone looking after the investments in the plan to ensure they align with long-term goals. That will be up to…



