Twenties Smarties: Enroll in 401K Plan Now

Last week, I launched a new series on the Ultimate Smart Money called Twenties Smarties.  This series is mainly targeting young adults in their twenties to advise them to take financial actions now so that they can be in better financial situation when they reach their thirties and later.   I believe successful execution of these financial actions now will help young adults build stronger financial foundation and provide stronger financial stability when they reach their thirties.

Achieve Long Term Focus by Enrolling in Your Company’s 401K plan

For those young adults who are fortunate to work for a company that provides an option to enroll in a 401K plan, taking advantage of such an enrollment is a must.  Besides the obvious benefit of starting an early long term investing and the company benefit of matching your contribution to 401K plan, there are a couple of more reasons why you should start a 401K plan immediately.

Saving money is a difficult task for many young adults.  At that age, they are more focused in enjoying life by spending money.  But for those who take the advice of starting the 401K plan while they are still in their twenties, not only do they begin long-term investing they also start saving money.  For young adults who are having difficulty with saving money, 401K plan can be very important to their financial foundation as it can be easily accomplished.  The money going into 401K is pre-taxed and gets deducted from their paycheck to their 401k plan.  The contributors to 401K plan will never get the opportunity to spend this money and automatically forces them to save for their future.  I am glad that I started my 401K plan when I was in my twenties.  Past 12 years, I managed myself save more than $100,000 in my 401K plan.  A big contributor to my success was the fact that I started 401K plan as soon as I joined my company out of college.

For reasons stated above, I feel that other IRA plans do not generally work well with young adults.  They are more likely to spend the money once they have access to their earning.  The exception would be for those who are diligent and consistent with their contribution to their IRA plan, which I know is hard for young adults in their twenties.

Another reason why you should start a 401K plan immediately is to build a stronger income source when you retire.  The problem for younger generation is that fewer retirement income sources will be available by the time young adults in their twenties retire in next 35-40 years.  For example, more companies are eliminating their pension plans.  I know my company does not provide pension plan to any new hires.  I was very fortunate to be grand-fathered in so I am one of those lucky people.

There is also an uncertainty with Social Security benefit and I am not confident if it will be available in next 30 years or so.  I am currently trying to save for my retirement assuming that I do not have Social Security benefit available by the time I retire.  Without the pension and Social Security retirement income sources, contributing to 401K plan now becomes a critical action for the young adults in their twenties.

Are you currently enrolled in a 401K plan with your company?  Why or why not?

  • Shaun @ Money Cactus December 8, 2011 at 8:05 am

    Great effort saving as much as you have in the last 12 years. Although we don’t have 401K plans in Australia I still think there is some good advice here. We have compulsory superannuation and employer contributions, but what many people don’t do is contribute themselves. Topping up your retirement fund by even a small amount is a great way to make more money over time.

  • Miss T @ Prairie EcoThrifter December 8, 2011 at 11:56 am

    We have a defined benefit pension plan where I work. My employer matches what I contribute. It is like free money which is great. The earlier you start the better.

  • krantcents December 8, 2011 at 3:02 pm

    I am in a 403B (401K for teachers/govt. workers). In a addition, I will receive a pension.

  • The Jenny Pincher December 8, 2011 at 3:04 pm

    I always enroll in my 401k as quickly as I can that way I get used to the money coming out before I’m really used to my paycheck and I don’t miss it. Great reminder for us all to take advantage of what employers offer.

  • Lisa @ Cents To Save December 13, 2011 at 11:58 pm

    I wished I had never cashed out my 401k when I was younger. Stupid decision.

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