401k, Now more than ever, it will pay to save.
While the monster 80’s hit Don’t stop Believin’ from Journey isn’t history for me; I was a Senior in High School when the single was released – songs and Albums were “released” back then, not “dropped”, back then “dropping” usually involved spilt milk or clean-up on aisle five 😊.
Since the introduction of “Internal Revenue Code Section 401(k)” on November 6, 1978, nearly 45 years ago, regardless of one’s opinion about the politics of Pensions (Employer or Taxpayer funded) or Saving (Employee Funded often with Employer match), 401(k) has provided a unique and powerful tool for individuals to save for retirement in a personable and portable way. Read on for some reminders of why saving NOW can still pay off for you in the future and remember; This blog strives to be about navigating from where you are, TO where you want to go, not complaining about the current state of things or whose fault it is.
Adaptation – 401(k) continues to be flexible. In response to current inflationary pressure, the deferral caps for 2023 were raised nearly 10% over 2022 to $22,500, along with corresponding increases to employer match limits.
Dos and Don’ts – Do be intentional about saving, START NOW, if you haven’t already and find a way to defer enough to max your employers match if they have one – the match is a free raise. Don’t check your balance every day during downturns. Richard Thaler, a Nobel prize winner from the field of behavioral economics found that retirement savers suffer from what he called “myopic loss aversion” when they see their short-term rates of return take a turn for the worse. (cbsnews.com/401k-mistakes)
The power of compounding – Math never changes, despite the latest headline. Consider the following example. Start today with an average Michigan salary (48,941 according to ZipRecruiter), defer 5% with a 2.5% employer match. Over 30 years, at just a 5% rate of return, net contributions are more than doubled in that time frame (206% to be exact). For context, the S&P 500 for 1992-2021 was 9.89%, or 7.31% when adjusted for inflation. That time frame includes two of the greatest economic shocks in our nation’s history outside the great depression – the 2009 mortgage meltdown and Covid. If one uses the 7.31% growth, the compounding triples rather than doubles the net contributions.
Don’t Stop Believin’, Do start Savin – you’ll be glad you did.
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