Benefits for those starting out

15.06.20 11:30 PM Comment(s)

From the Clipboard - Retirement - 401k for those just starting out?

Congratulations to all of the new college graduates.

Hopefully they're lucky enough to be off to their first real job in their fields. My son recently graduated from UMass Amherst (#GoUMass), and will be working for a law firm in the area; his first real job after college graduation with benefits. That also means that I've been getting a lot of questions from him and others about different benefits, particularly what to pick for a retirement plan in context of their overall finances.

The general rule of thumb has always been that the younger you are, the more you want to save in a 401k or a retirement plan to take advantage of that long time for compounding. Save a little today, as the theory goes. And 40 years from now when you retire, which sounds like an incredibly long time - and it is - but 40 years now when you retire you'll have a lot of money.

But is that really the best move for those graduating now? I'm not so sure, for a couple of reasons. Yes, take advantage of any company match that you might be offered. After all, that's free money, particularly if it's a dollar for dollar match. If it's a little bit less than that, say, it's 25 cents on the dollar. It's umm… uhhh... maybe. It's not as good but still free money.

One thing for anyone who's just starting out in the careers, or anyone who expects to make more in the future, whether through raises or promotions, a Roth 401k or Roth IRA is far more attractive. If you're starting out in your career, chances are you’re at a lower income level today than you will be in retirement. Taking advantage of that tax deduction now really doesn't make a whole lot of sense, right? You rather pay tax a lower tax or have tax free income at a much higher tax bracket later on?

The other thing is that should you save everything you can in a retirement plan, whether it's a 401k, traditional or regular? You might not.The reason for that is retirement plans are meant for retirement, which again, might be 40 years away. In the meantime, you might have other goals like building up an emergency fund, paying off debt, or buying things you need to get your career started, whether that's new clothes, or a new car. A 401k is a terrible way to save for those things. Quite frankly, you get penalized if you access the money early for anything other than retirement. 

Another vehicle might be a Roth IRA. In the case of a Roth IRA, you are able to tap that principal, the money that you put in at any time for any reason, tax free and penalty free. Now, that's not true for the earnings in that account. But it is true for the principal, your contributions in that account. Or, there's also other vehicles you may want to take advantage of that are treated similarly.

Again, the idea of that common sense advice of ‘Hey, save as much as you can for retirement now while you're young, so you end up with a ton of money later’ is generally true. It might not be true in your specific circumstance, because you might want to accomplish other goals between now and retirement - building up an emergency fund, paying down debt, buying a new car, or you might even need a down payment for a new house, down the road. All those things are things that a 401k is not good for.

My content is for educational purposes only and should not be construed as advice or any kind of solicitation to buy or sell anything. As always, consult your own financial or tax professional for your own specific situation. Your mileage may vary. Batteries not included.

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