Saturday, November 29, 2014

Advice For Those Just Starting Your Careers

My son is finally eligible to participate in a 401(k) plan through his employer, and of course he came to me at Thanksgiving dinner for advice.  First important message: a 2% withholding from your paychech may sound like a lot of money out of the paycheck, but it really isn't.  The withholding for a 401(k) is taken out before taxes. so for most people a 2% reduction in gross pay will only be about a 1.3% reduction in net pay.  On a $500 paycheck, that's only $6.50 less pay.  You will see the change, but just barely.  One fewer meal out will cover it.  This also means if you have the choice to have 3% or 5% going to your 401(k), think very hard about doing so.  A 5% reduction in pretax pay is about $17.50 less in  the paycheck. 

When you get to be retirement age, that 2% withholding will be worth about $99,000, assuming a 7% growth of your 401(k), or $346,000 at a 12% growth rate.  A little little less spending now [roduces enormous returns in the future.

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