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Are you there yet?13 12 04 17  23
--------My 401k plan open enrollment reminder e-mail just arrived. I took a glance at it, and decided that I wouldn’t have to change anything at this time. A reminder for me that such plans provide a sensible strategy to retire in comfort, with minimal effort. It also reminded me that next year (2005) the federal government (and on most situation state governments) is allowing us to shield from taxes $14,000 USD (up from $13,000 this year) in 401k plans. Most of my friends work for companies that offer 401k plans, and some of them even match some of the contributions (making the real maximum you can contribute around $17,000). The good thing about 401k plans is that the money you place in them grows and compounds without paying a single cent of taxes, up until the point when you retire the money from the plan (in small installments or at once, is up to you). Money invested in a tax defered account grows significantly faster than one in a taxable account. Money grows in a variety of investments that you tailor to your needs and risk comfort level (I suggest SP 500 Index funds, but more on that on a different article). You can keep these investments even if you change jobs, and you can start receiving the money at 59 ½ years old (way earlier than the 67 years your social security may require). If for some reason you have financial hardship along the way, you can also get your money out earlier penalty free. If you don’t have a financial hardship, but still need the money, most plans allow you to take loans against your savings. People ask me sometimes how do they retire early. Retirement planning doesn’t have to be complex. A simple real estate investment and a maximized 401k plan will get you to a place most people want to be: financial freedom. If you haven’t started working on both of those options and you ask me about a good retirement strategy, I will simply ask you: Are You There Yet? (Meaning, have you maximized your pre-tax investments, and secured yourself a sensible residence?) You may want to read about alternative retirement options. Carefully study the table that follows. It shows that if you are 30 years old, you invest the maximum the government allows to a 401k plan, and you invest in a mixture that closely matches the market you end up with around $750,000 of today’s money when you are 60 years old. That, together with a house valued at today’s $250,000 with a paid off mortgage (30 years later), brings you to be a millionaire in today’s money. (Market has performed at about 11% average over almost a century; I assume 10% returns on the table. I also asume a 4% inflation rate). Year Age Contributed Appreciation Actual Value 2005 Equivalent |