Starting at age 25, if you save $100 a month in a regular savings account for 40 years at the average interest rate of 0.47% annual percentage rate you would have just $52,367 in retirement savings.
However, by contributing the same amount to a 401(k) plan, assuming a conservative rate of return of 6.5%, you would have saved $218,107 by age 65. This is without an employer contribution. With a 3% employer contribution, your savings would jump to $436,215.
This shows how small, consistent contributions can grow significantly over time. Start now and let compound growth work for you!
Planning for retirement can often seem like a daunting task, but understanding the basics of your 401(k) can help make the process more manageable. A 401(k) is a retirement savings plan offered by many American employers that has tax advantages for the saver.
It is important to recognize that your 401(k) savings can greatly affect your financial stability in retirement. Experts typically suggest saving at least 15% of your income, including employer contributions, to maintain your current lifestyle. This goal varies with age, but it is never too late to begin saving. If 15% seems daunting, start with a smaller percentage and gradually increase it over time. Employer matching contributions can also help boost your savings.
One of the key benefits of a 401(k) is the tax advantage it offers. Contributions are made pre-tax, which means the money is deducted from your salary before taxes are taken out, reducing your taxable income for the year. Additionally, the funds in your 401(k) grow tax-free until you withdraw them in retirement, allowing for compound growth over the years.
Understanding and managing your 401(k) is essential for ensuring a comfortable retirement. Stay informed about your contribution rates and take advantage of employer matching if available. Starting early and contributing consistently can make a significant difference in your retirement savings, providing you with the financial security you need in your later years.
Sources: https://www.cnbc.com/average-401k & https://finance.yahoo.com/retirement-saved-100-month