Forced Savings Programs for 401k Retirement Plan

Most people would never build a whale of a 401k without being encouraged to save. And it’s not your mom or dad ordering you to put money away this time. Your employer encourages you to join its retirement savings programs and even sweetens the pot by making contributions on your behalf. Once you sign the necessary paperwork, your contributions are invested automatically each payday. The money is put away before you get your hands on it.

Even the president is getting in on the act. Speaking at the National Summit on Retirement Savings, President told employers they can now automatically enroll employees in their 401k plans. If employees don’t want to join the 401k defined contribution plan, they will be required to opt out. The Treasury Department approved the automatic enrollment. The president expects this approach to increase the percentage of enrollment in 401ks to 90 percent. The commander-in-chief believes that his action will force people to save for retirement. And it’s quite obvious that many people need a push.

The SunAmerica survey helps illustrate why some people need forced savings programs. Sixty-one percent of women and 53 percent of men reported they usually have little or no money left to save for retirement after paying their bills. With 401ks, you don’t wait to see what’s left over before investing.

The beauty of forced savings is that you’re paying yourself first. Many people take a reverse approach to savings. They save what’s left of their paycheck, if any. When you depend on your personal initiative to save, it often doesn’t happen. You avoid this problem with forced savings program. It takes no effort, willpower, or discipline.

401ks are the best forced savings vehicle you’ll ever find. In time, you won’t even know that you’re missing money from your paycheck. In fact, your take-home pay won’t be much lower, because your salary is reduced by the amount invested in the 401k so you’ll pay less taxes. You’ll get used to living on the lower amount and will be saving painlessly. Over the years, you can accumulate tens of thousands of dollars.

Whether you earn a small paycheck or a large one, 401ks are an incredible retirement investment vehicle. If you pull down a big salary, you can put away up to $10,000 year. The ceiling is growing.

The only way to derail a rapidly growing 401k is by dropping out of the plan or borrowing money from 401k. Of course, you must first agree to participate. Don’t make the excuse that you don’t intend to stay long with your current employer. If you wind up staying there for any length of time, you’ll be glad you’re in the 401k.

There are other forced savings vehicles, but 401ks and similar plans are the best. If you’ve tapped them to the max, you might consider others like payroll deduction or automatic investments that are deducted from your checking account. Mutual funds will arrange to take a preauthorized amount from an account to purchase shares.

Another difficult decision is whether to enroll in a 401k plan or put the money in an IRA (SEP-IRA and Simple IRA). There are no absolute answers as to which is better. Because your employer is usually kicking in a contribution to the 401k, that account will grow faster. But ideally, you’ll be able to make the maximum contribution to a 401k plan, while still contributing to an IRA.

There’s still time to build a nest egg, even if you’re getting a late start on saving for retirement. Let’s look at Rex who’s pulling down $65,000 as an engineer. Rex is 40, but looks 39 thanks to Rogaine. His goal is to wind up with $200,000 in his 401k. Until now, he’s found excuses for not enrolling.