Retire with dignity. Don't want to rely on spam sandwiches and off-brand prune juice in your old age? Retirement savings are pretty much a must. The government, for all their stupidity, actually realizes this fact, and allows for savings beyond the very flimsy Social Security system, in the form of a 401k retirement system.
The Roth 401k was created back in 1978. The 401k is a "defined contribution plan," meaning that the money put in by the employer and worker are defined. It is not a "defined benefit plan," where your boss would be on the hook for investment return minimums. That is, if you worked for the government and had their version of a 401k, you would qualify for a minimum stock market return, whether the market did well or poorly. The taxpayers would make up the difference to whatever minimum your union had negotiated for you. Lucky you.
A lot of people choose a 401k because most employers will match contributions. For every buck you put in, your employer may give you another buck—until you retire. It's like a twofer on your investing dollar before you even start investing the dough, and it's probably the closest you're going to get to free money from your boss. The key idea behind a 401k plan, in whatever flavor you invest, is that the investment, in whatever amount it ends up being when you retire and begin withdrawing cash from it at the mandatory 70-1/2 distribution age, is that the money withdrawn at that point is taxable as ordinary income. Why all the bother to defer your money if you're going to be taxed on it anyway? Because most people pay a much higher marginal tax rate in the glory days of their 58-hour-a-week work careers, and pay a much lower percentage rate when they need less money in their old age, when instead of worrying about paying their kids' college tuition, their dreams revolve mostly around new dentures.
Related or Semi-related Video
Finance: How to Stay Rich91 Views
finance a la shmoop. how do you stay rich after you get rich ? spend less than you
make. how's that sound yeah genius. well but pretty obvious and
easy to do if you earn enough money to do so, right? so if you're watching this [man sits down to eat]
video you're either rich or you plan to be, and you want to stay that way pretty
much forever until your doing you know the backstroke Six Feet Under.
well the way in which you got rich in the first place here matters a lot. for
many a long successful corporate career got them to the nice houses the
convertible Ferrari the private school for the kids the custom golf club set
and the wine collection. their wealth just accumulated slowly over time but
likely in two forms. in America most senior executives receive nice cash
salaries half a million a million a few million dollars a year. they live off
that pay and save some of it. but their real wealth usually comes from partial
ownership in the big corporations they run in the form of stock options. well at
the end of a career the options might have compounded for decades and be worth
tens of millions of dollars or more. typically the executives slowly sells [stock chart]
off those options in retirement and looks back on an awesome corporate life
optimizing the sale of soap or lawn fertilizer or car tires or whatever they
did to get rich in the first place. not a bad way to go if the corporate gig is
for you and you don't read about these people going bankrupt very often because
a well let's face it they're probably pretty boring. or at least their career
selling soap was, and B they got rich slowly accumulating wealth quietly
almost hidden to them and to their friends over long periods of time. they
were technically probably rich in their mid 40s or so and they just continued to
dance the dance that brought them to the party in the first place.
so that's the get rich slow plan and it is time-tested it works. but what about [people throw a party]
the get-rich-quick plan you're a 260-pound runner with a four point four
second forty. you can read so you were accepted to Alabama where you don't
graduate. you're drafted by the Jaguars and you get a
million dollar signing bonus. your buddies ask you hey pal what time is it
you look confused they say Ferrari time and ah here's
where our story gets sad. you forget a whole bunch of things mainly that it's
likely your NFL career will be short and when it's done you will likely have the
earning power of a high school football coach. like you know 50 60 grand a year
or something like that not terrible just not rich. oh and there's this other thing
called the taxes. that million dollar signing bonus was really nine hundred
fifty grand after agent lawyer fees travel and other stuff then he paid [equation pictured]
taxes of three hundred fifty grand and netted six hundred K in your pocket. but
you just went out and spent four hundred fifty grand buy that Ferrari so now you
have just one hundred fifty grand left in your pocket to buy that home how's
this shoebox look. so you wait hope your rookie seasons a hit and as you drive
around in your Ferrari you wonder if people will laugh at you if you happen
to flame out and you realize too quickly that if you go to sell the car in two
years that'll maybe bring you 200 grand. and yeah Ferraris depreciate fast. sad
story but way more interesting than the soap seller. in fact most NFL players
like eighty percent of them go fully bankrupt. which means that another ten to
fifteen percent of them end up just really really really not wealthy. how can
this be if they played in the NFL at least at one point wouldn't you have [pie chart]
considered them to be rich or at least rich ish? no but something bad clearly
happened here. well in almost every case at least one of three things happened.
they spent too much money spent on junk they didn't need or couldn't afford like
that Ferrari. B they invested their savings into restaurants or bars or
other things where the odds of success were vastly stacked against them winning.
or see they got divorced. yeah always a financial killer there. well want the to
long didn't listen version don't spend your money like you're gonna make your
current salary for the rest of your existence.
stuff happens enjoy life but protect yourself by holding on to enough savings
as should things take the ugly turn. invest wisely and all that and maybe see
a marriage counselor. if you want to know what it all boils down to, keep making
money yeah you never have enough because you know
what's gonna happen. that doesn't mean you need to pound the pavement selling[man goes through air port]
vacuum cleaners till you're 95 but you also shouldn't call it quits at 45
because you're finally a millionaire yeah a million bucks just ain't what it
used to be.
Up Next
What is a 401(k)? A 401(k) is a retirement plan that is offered by many employers (government entities, however, use a 403(b) plan). These plans us...
What is a pension? Pensions are just retirement plans. Employers provide them and pay into funds as an investment for their employees. Once employe...
What do you need to retire? Retirement - think: 401k, pension fund, IRA, roth IRA, etc. All of these savings socked away while you worked hard are...