Wednesday, December 01, 2004

Secrets of the 401 K.
The 401K is the best tool available to an individual for secring her retirement. In my opinion it is a sin if you are not contributing to your 401K. Regardless of your financial or social situation, I firmly believe that investing in a 401K plan is the smartest decision any individual should make, here’s why

First an overview, In contemporary United States your post retirement life rests on three pillars. The first is Social Security Income (a pillar that reminds me of the ones on the Parthenon in Athens that once represented glory but is now fast crumbling), the second is your personal savings/home and the third is your 401K account. In the last 20-30 years the 401K plans have gotten more and more popular, before the 401K your employer took care of you through the pension plan. You were assured a monthly income based on your length of service and your income at retirement. However in the last 20-30 years companies have conveniently shirked of their social responsibility and ended pension plans. The ever obliging, political donation hungry congressmen and senators then came up with the 401K plans where the responsibility is shifted from the corporation to the individual - you. Nothing wrong with making an individual responsible for their destiny - however too many people do not realize how their lives will be turned into misery unless they take the right decisions early in life.

This has to do with one of the most important but often ignored fact of investing and life
“The power of compounding”. After all there was a reason Albert Einstein called “compounding” the most powerful force on earth. Let us illustrate this with an example – shamelessly borrowed from one of the most amazing investment books I have ever read

Why Smart People Make Big Money Mistakes--and How to Correct Them: Lessons from the New Science of Behavioral Economics
by Gary Belsky & Thomas Gilovich

Meet Jill and John, twenty-one year old twins who just graduated from college. Jill, immediately upon entering the workforce, began contributing $50 a month to a stock mutual fund and continued to do so for the next eight years, until she got married and found more pressing uses for her money. John, who married his college sweetheart immediately upon graduating and soon after started a family, didn’t start investing until twenty-nine. Then he too contributed $50 a month to the same stock fund, and he continued doing so for thirty-seven years until he retired at age sixty-five. All told, John invested $22,200, while Jill contributed just 4,800. At age sixty-five, which of the two siblings had the most money, assuming an average of 10 percent per year?
As expected the obvious answer is wrong – hence the example. Here Jill ends up on retirement with $256,650, vs. $217,830 for John.

“Compounding is the most powerful force on Earth” – Albert Einstein.

As illustrated starting early helps regardless of whether it’s a 401k or not
The 401K is a great tool to start investing also because of a few more reasons
-It is pre tax dollars so you save federal and state income taxes.
-An even greater benefit is that it is automatic, the contribution goes out of your paycheck even before you see it thus you are investing thru discipline – it is much harder to put money away once it is in your hands than if it goes away before you even see it.
-The 10% penalty prevents you from trying to touch it for frivolous reasons.
-Employers often put in matching contributions to a limited amount.

No brainer as to why a 401k’s is awesome…..

The 401K is your surefire way to a dream retirement – use it to the fullest extent. Some other useful sites to answer any 401K questions or personal finance questions.

http://www.fool.com
http://www.bankrate.com
http://mutualfunds.about.com/od/retirement/

If you a still skeptical here is a suggestion atleast contribute the amount that your employer is willing to match - you get an instantaneous 100% return on your investment!!

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