Contributing To An Individual 401k

Whether you're twenty-one, thirty-one or forty-one

, saving for your retirement is something that can never be started early enough. Not only do each of us want to be sure we're ready for the future, but we want to make sure we can maintain a certain standard of living after we've reached retirement age. As much as we'd like for the Social Security program to be enough to handle all those needs, it commonly isn't. Using an individual 401k to help bridge that gap can mean the difference between retiring at sixty-five and retiring at seventy or not at all.

The idea behind an individual 401k is simple. Using regular contributions, the program's administrative body invests in a selection of different savings programs. That money remains one hundred percent vested, meaning its ownership is never in question. Any returns earned by these investments are then added back to the original contributions to be re-invested again. These programs have been so successful that most employers either offer to enroll new employees in them or offer to match a certain level of contributions by their employees.

Individual 401k matching programs offered by employers are normally a function of payroll. Many companies deduct directly from a paycheck, matching the annual contribution at the end of the fiscal year. An employer match program might offer to match 100% of all contributions up to a certain amount of each paycheck. Employer contributions between 1% and 3% are common, more than that is considered very good, though most will drop their match down to 75% or 50% of all contributions above 3%.

The rate of return on an individual 401k can vary wildly depending on market conditions. During high performing quarters, returns can range between 15% and 20%, which is quite a large return. Most long term investment specialists will caution you in this regard however, and tell you that you should expect your returns to range between 10% and 15% depending on the investment strategy used by your program's administrative body. Even at this lower rate, an individual maximizing their employer's match program can expect to retire very comfortably.

The problem most people have when utilizing individual 401k programs is that they are commonly late to the party. Someone who begins contributing to a 401k as soon as they get out of college, age 22, can expect to retire as a millionaire, or close to it, while someone just five years behind them will never manage to catch up to them in contributions. Even doubling the amount invested, the timelines never meet. This is just one example of why early investment in retirement accounts is important for anyone who would like to spend their retirement years in comfort rather than being forced to continue working on into their late sixties or early seventies.

Each of us hopes that our golden years can be spent in comfort, and each of us hopes that we'll have the means necessary to make that a reality. The fact of the matter is if plans aren't made and opportunities aren't taken advantage of early on those dreams can't come true. Using all the tools at our disposal is the only way to guarantee that what we want and what we can have can match up and using a 401k, or other investment vehicle, is one of the ways we can secure our future. If given the opportunity to do so, make sure to consider a 401k, review the policy your employer offers and ask as many questions as you can. Take control of where you want to be when the time comes for you to leave the workforce behind.

by: Tyrion Lannister

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