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Title: An Impactful Retirement Savings Strategy Worth Considering in the Long Run

Maximizing your 401(k) contributions brings two compelling advantages: tax breaks and an "employer match."

Title: Making a Big Move for Retirement: Why This Strategy Could Pay Off Handsomely
Title: Making a Big Move for Retirement: Why This Strategy Could Pay Off Handsomely

Title: An Impactful Retirement Savings Strategy Worth Considering in the Long Run

Hey there, my kid just wrapped up college and is about to embark on their first "real job." The other day, they asked me, "How much should I put into my 401(k)?"

What's a 401(k) and why's it a good idea?

If you're scratching your head, wondering "What's a 401(k)?" let me break it down for you in simple terms: It's the most popular retirement plan offered by U.S. employers. The way it works is like this:

Your employer pays you a salary, say $68,500, which is the average starting salary for U.S. college graduates in 2024. Your employer also gives you the option to set aside a portion of this salary, say 10%, or $6,850, and deposit it in a 401(k) retirement plan. Because you don't get your hands on it right away, you don't owe taxes on it right away. You'll pay taxes when you withdraw the money from the account during your retirement years. That being said, the main advantage of opening a 401(k) account is that you get to defer some taxes.

How much should I put in my 401(k)?

Now, to answer your daughter's question. You should put as much money as possible into your 401(k).

Why? For starters, the more money you put in, the less you pay in taxes. Second, many employers encourage you to contribute to your 401(k) by offering matching funds. This means that for every dollar you put in, your employer adds an additional dollar, or even more, into your 401(k).

However, not every company offers a match, and if they do, there might be some limits. For example, if you're allowed to contribute up to 10% of your salary, your employer might only match the first 5%. Or your employer may offer to match 50 cents for every dollar you contribute.

Regardless, every match means free money your employer is giving you for your retirement. So, put as much money into your 401(k) as you can.

Employer Matches Affect Your 401(k) Contributions

According to the data, the typical employer match for 401(k) contributions varies from 4% to 6% of an employee's compensation. This extra income can be a significant boost to your retirement savings. Common employer match structures include partial and full matches, and each company may have specific guidelines based on certain factors, such as company policies, dividend payments, and employee participation. Make sure to check with your employer to find out more about your company's 401(k) plan and matching contributions.

After learning about the benefits of a 401(k), it's essential to consider how much finance you should allocate towards it for retirement. As mentioned, contributing more money to your 401(k) means less tax liability in the long run and might even earn you free money through employer matches. In fact, according to statistics, the typical employer match for 401(k) contributions can vary from 4% to 6% of an employee's compensation, which could significantly contribute to your retirement savings.

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