Too lazy to set up your 401k? Too afraid of the paperwork? Feel like you’d rather use that money on stuff right now? Well buck up, son, because I’m about to tell you why you can’t afford not to use your retirement plan.
A 401k (or 403b if you work for a nonprofit) is your basic retirement fund. You set it up with your employer so they can take money directly out of your paycheck and squirrel it safely away for you to use when you’re terrorizing orderlies in the nursing home. That way you can focus on maintaining your record as Wheelchair Drag Race Champion of Shady Hills Retirement Community and not get distracted by petty financial concerns.
But the trick is you have to opt into your 401k. It’s not forced on you, and it doesn’t happen automatically. So against your best interest, you can actually choose to just not save for retirement. And as broke as you are right now, ignoring a perfectly good retirement fund is a terrible idea.
Look, I get it: when you need money right the fuck now, it’s hard to even consider saving for your retirement. But you should do it anyway. Even if you have a mountain of student loan debts right now. Even if you’re trying to save up an emergency fund right now. Just do it. Future You will thank Now You. Here’s why.
Before tax income
Your income is taxed by the federal and state government. Unless you’re self-employed or a freelancer, these taxes come straight out of your paycheck, so most of the time you don’t even notice what you’re missing because it doesn’t even make it to your bank account. What you get on pay day is only your after-tax income.
But if you have a 401k, that money is taken out of your paycheck before taxes. That’s right: you don’t pay income taxes on the money you put in your retirement fund. Tax-free income! That you get to keep! It’s like you’re getting away with tax fraud, but not!
Leave your 401k lying dormant and empty on the other hand, and the money that you could have filled it with gets taxed just like the rest of your income. And unless you’re this guy, you don’t want to pay more taxes.
A lot of 401k programs have what’s called an employer match. This means that if you put money into your retirement fund, so will your employer. Yes, you read that right: all you have to do to get your boss to pay you more is to save for your retirement. You put money in your 401k, and your company will put more money in on top of that. I shit you not, this is a real thing that can happen to you.
The “match” part of the employer match means that your company agrees to match a certain percentage of your monthly 401k contribution, say 5% or so. This is money that would otherwise be going toward your CEO’s daughter’s Lamborghini fund, but because you are a financially savvy bad-ass, you’re getting it instead. The world doesn’t need another 16-year-old with an overpriced luxury vehicle. But you need dat cash money.
I love the law of compounding interest so damn much. It’s sexy, it treats you right, and it will never break your heart.
Simply defined, compound interest is interest added to the principal of a deposit so that the added interest also earns interest from then on. Here’s a graph to illustrate this sexy financial concept:
I know, right? I’ll give you a moment to collect yourself.
Collected yet? Great, because you might want to read more on this retirement fund stuff:
- Dafuq Is a Retirement Plan and Why Do You Need One?
- How to Save for Retirement When You Make Less Than $30,000 a Year
- Investing Deathmatch: Traditional IRA vs. Roth IRA
Now picture this: that beautiful, gracefully upward-sweeping blue line diverging from its more rigid green counterpart at increasingly more dramatic intervals is free money that you just get to have if you contribute to your retirement fund. The amount of free money you get will constantly increase over time. All you have to do is keep contributing to your 401k every month. You don’t even have to increase your contribution (though you totally should every time you get a raise). You can just keep tucking away $200 or so of that sweet, tax-free, employer matched cash every single month and the compound interest could eventually double your money.
So why the hell aren’t you contributing to your 401k?
What, you don’t like free money? Does accepting money you didn’t technically earn bother you? Do you want the satisfaction of knowing you had to sweat for every damn dollar you’ll use on puzzles and hemorrhoid cream in your dotage? Do you genuinely think you can afford to pass up on extra free money?
Well get over it, fool. Because you have literally no good reason not to contribute to your retirement account, and at least a couple hundred thousand reasons why you absolutely should.
So go talk to your HR manager or your boss or company accountant—whoever handles the paperwork for retirement accounts at your place of business. Don’t know who to talk to? Ask a coworker. Look it up in the employee manual. Whatever. But do it tomorrow because every day you don’t contribute to your retirement account is a day you’re not accumulating free money. For real.