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What is a 401K and should I apply for one in my first job?

As I prepare to go into my career, I know insurances and benefits are a huge part of accepting a job. I have never really understood what a 401K is and if I need to apply for it! #401k #insurance #interviews #job-applications

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Chris’s Answer

A 401k is a program offered by some employers that allows you to save for retirement.   Many times your employer will also contribute to the account.  This type of investment account can have some nice tax advantages also.


I highly recommend starting early when saving for retirement.  We can't be 100% sure Social Security will be available when we retire.   The money you put in now will have the advantage of time.   In the long term your money will most likely grow.   If you invest $1,000 at the age of 22 it could be worth over $52,000 by the time you hit 68.  (This is assuming a 9% investment return over 46 years)


Time value of money is on your side when you are young!  Invest what you can and watch it GROW! 


There are many future value calculators out there online.  Check them out.  You'll see just how powerful the time value of money is. 


There is also a simple investment rule of thumb out there called the Rule of 72.  This basically says to divide 72 by the rate of return on your investments to see how long it will take to double. 


So let's say you have a 9% rate of return.  Your investment will double roughly every 8 years. 



Chris recommends the following next steps:

I suggest you do some research on the time value of money. See just how powerful that is. How investing early gives you a tremendous advantage when saving money
Also look up compound interest. Those that understand compound interest will earn it. People who don't understand compound interest will pay it. Try not to pay it.
I think of saving and investing as financial self-defense. Game plan where you want to be in 10, 20, 30 years. It seems like a long way off, but I SWEAR it isn't. Understand finances and budgeting. You will have a better opportunity for financial freedom
Thank you comment icon Thank you for the advice. Anita
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Lisa’s Answer

You should definitely start as early as you are able to. As others have said, many employers offer to match your contribution up to 6%!
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Pat’s Answer

Getting started with a 401K as soon as possible is highly recommended. This is money that mostly you would otherwise be losing towards taxes. It is especially important to invest in a 401K if your employer will match any of what you are putting in. This is FREE money. The earlier you start the more time it allows for this money to grow and will allow you to have one less worry about retirement.
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Pablo’s Answer

A 401K is an employee retirement program that lets you contribute up to $18,500 annually and is tax-advantaged (you won't pay taxes for those contributions until retirement). Usually your employee will match your contribution (3% to 6% of you total annual compensation). The recommendation is to max out your employee contribution and to start as early as possible. Compound interest will make your contribution and your employer contribution grow substantially every year. Also, research Roth IRAs as 401K can be converted to Roth IRAs as you advance in your career and also have other important tax advantages in the long term.

Pablo recommends the following next steps:

Research compound interest
Find 401K calculators, you will input hypothetical number and see what's the difference between investing at your 20s vs investing at your 30s
As you advance in your career, research Roth IRAs and 401K to Roth IRA conversions
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Scott’s Answer

A 401k is a pre-tax retirement investment. It allows you to prepare for retirement and most companies will match the first 3 to 6 percent- free money. You can contribute up to 18.5 thousand annually and my recommendation is that you start contributing your first check. How much you contribute is up to you but make sure you know your company matching rules as you want to, at a minimum, contribute enough to get the entire company match. You will never regret saving for your retirement and you will be amazed at how it eventually grows. Good luck!!

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Emily’s Answer

A 401k is great to get started as early as possible. Many employers offer benefits for contributing to your 401k that typically consist of matching the amount of money you put into it annually, up to a certain amount. You should find out what the benefits are and what amount they will match up to and make sure you put in at LEAST that much so you don't lose out!
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David’s Answer

A 401K is a retirement account getting started young and inventing in this is a great idea, the sooner you start the better off you are. May employers who offer a 401k also provide some kind of contribution to the account above what yo would contribute. This s a great way to save up.
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Rick’s Answer

I am a huge fan of 401K plans and would highly recommend getting started in one as soon as possible. It's basically a savings plan where you can set aside and invest a certain percentage of your pre-tax income. As you compare 401K plans from your prospective employers, you will need to clearly understand how much of your contribution amount they will match.
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Ann’s Answer

Good question! Having a 401k is a HUGE benefit. I recommend contributing 15-20% ALWAYS. This could afford you early retirement, ability to use the money for home improvements, etc. Employer-match programs are a huge plus. In addition, when you are enrolled in a 401k, keep an eye on your investment/contributions. They often fluctuate. But that doesn't mean drastically change everything if you lose money over a period of time. Stay the course and if it isn't working, get a financial advisor who is an expert with investments. I lost $25k last year in mine and it's already all back and more.
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Patricia’s Answer

Hi, yes you should start a 401k as soon as you join a company or firm. Make sure you inquire if they match your contributions. This is a fantastic way to start saving for retirement. Which is never too early to do. Sometimes there will be tax benefits also. Definitely, join before you get your first pay check. You will never actually miss the money because you are saving it for your future.
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Abel’s Answer

Hi Karen,

A 401k is a retirement savings vehicle that can be used to save for your late stage retirement. You can also use it as a "tax advantaged" account to assist in lowering your overall tax burden through sending pre tax dollars to your 401k during your high earning years. I highly recommend investing through a 401k. In 2021, the limit for contribution to the 401k has increased to $20,500. I would recommend that as you are able to, contribute to the maximum limit allowed to allow compound interest to play in your favor. Remember, if you decide to withdraw the funds early, you will be subject to a 10% penalty alongside of any capital gains taxes on the gains of your investment. For that reason, I also recommend investing in a taxable brokerage account as you are able in the event you need access to funds not dedicated to retirement. I hope this helps to answer your question. Good Luck!
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Michael’s Answer

A 401K is a retirement savings vehicle where certain companies will match a portion of your deductions pre-tax. It's an excellent way to save for retirement and you should absolutely take advantage of the programs.
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Bill’s Answer

Karen - a 401(k) plan is an employer-sponsored defined-contribution pension account. Employee funding comes directly off their paycheck and may be matched by the employer. If your employer does match your contributions, you need to take advantage of that matching as that free money in your account and one of many perks your employer is providing to you as an employee.

Once you set up your 401(k) account, the next key step is to find funds that are available to you and choose the ones that will provide you with the most growth. If you are young and just getting started, you are going to want to find "aggressive" funds that can be more risky, but in the end will provide for more growth. You'll want to discuss with a financial planner to find the funds that are best for you.

Good luck on your career.
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Sarah’s Answer

Hi Karen,

As you've probably seen in the other answers, a 401(k) is a retirement vehicle and it is best to use if you can -- starting off your career by saving early and often is ideal! Employers contribute varying amounts to your 401(k) plan, and typically they will "match" what you contribute, up to a certain point. It is a good thing to have as an option and knowing how much your employer will also contribute on your behalf may help you determine how much to contribute yourself, if you're not able to contribute the full amount each year.
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Jason’s Answer

Since most employer no longer offer traditional pension plans, a 401K plan is a good alternative, especially is the employer also contributes to your 401K plan. Many employers still have matching. Effectively, every dollar they put in, is free money to you. So look for those employers that offer this benefit. The other major benefit to a 401K plan is that each dollar of your own that you contribute, is usually tax deferred. This means, you do not pay tax on the amount you contribute now. Instead, you'll pay the tax long down the road when you start taking money out. The vested amount in your 401K plan is your money.

Even if your employer does not sponsor a 401K plan, you can invest your own money to tax deferred savings such as IRA's.

No matter what you do, find a way to limit your debt, especially credit card debt, and save money for your retirement. Starting young is the way to go.
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Bryan’s Answer

ABSOLUTELY you should begin contributing to a 401k as early as possible in your career - the compounding of interest across your career is an AMAZING tool to help you prepare for retirement. Most companies match at least a portion of your contributions - so both your contributions and your employers contribution grow over time as you invest the money. Perhaps one of the greatest things about contributing to a 401k is that the money is taken out of your paycheck BEFORE taxes and allows your contribution (plus the company match) to grow over-time without being taxed.

While you may find it hard to think about putting money into your 401K, I can't stress enough how powerful it can be to secure your future. There are plenty of calculators out there to help you evaluate how to best save money for retirement - check out www.calculator.net for one example. As you work through different scenarios, one thing becomes VERY clear, starting early in your career is the key....you will find that if you wait to start later in life you will end up having to save much more money each year to get the same outcome.

What seems like a sacrifice when you are young will translate to SO MUCH MORE FLEXIBILITY for you when you are older.....trust me!
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John’s Answer

A 401k is a retirement investment account that allows you to prepare for retirement. Most companies will match your contribution, even sometimes up to 6%. A traditional 401k will use pre-tax dollars from your paycheck each period, and a Roth 401k with use after-tax dollars from each paycheck. Both options are great to start saving for retirement!