The Simple Way Anyone Can Earn This High Interest Rate on Your Retirement Savings
Written by
Brooke Barley
Edited by
Zuri Anderson
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The average savings account earns just 0.42% in interest, according to Business Insider. One way to save that people might be overlooking, or putting off for when they’re older is contributing to a 401(k) account.
These retirement savings accounts have an annual average return of 5% or more. This is a phenomenal rate, and will set you up for success in your golden years. Still think your money is better spent today than saved for retirement? Here are some expert tips as to why you should start funding your 401(k) today.
Your Interest Compounds
Lucia Lu, the senior consultant at Nextpins, said one of the main reasons to start investing in your 401(k) now is because of the interest your savings will earn for years to come.
“Your money works for you and grows exponentially as the years go by. Even small regular savings can make big differences in decades to come,” Lu explained. “A 25-year-old investing just $200 each month can accumulate a substantial nest egg in retirement through the wonders of compounding.”
Your Contributions Aren’t Taxed
The money you put into a 401(k) account comes out of your paycheck before taxes do. Jordan Mangaliman, financial advisor and owner of Goldline Financial Services, explained that enables you to save even more.
“Your pre-taxed contributions then grow tax-deferred, which allows your growth to be uninterrupted by taxes,” he noted.
This also reduces your taxable income, so you’ll pay less come tax season.
“Contributions to a 401(k) reduce taxable income by the amount of the contribution,” explained Robert R. Johnson, a professor of finance at Heider College of Business and Creighton University.
Even though withdrawals from your 401(k) will be taxed, Johnson said it’s better for them to be taxed during your retirement than now.
“In most cases, retirees will be in a lower tax bracket than they would’ve been when they were working, so the amount of taxes paid to the government would be less in a 401(k) account,” Johnson added.
Your Employer Might Offer a Match
Some companies will offer their employees a matching 401(k) contribution up to a certain amount. This is basically free money for your future. Mangaliman recommended that anyone who has the benefit of a 401(k) match from their company immediately start taking advantage of it.
“For example, if you contribute 4% of your income, your employer may match you 4%, as well,” he said. “This essentially doubles your contributions and increases your growth substantially.”
Your Contributions Are Protected
Putting money into a 401(k) offers you more security than other accounts might.
“Because it’s governed by ERISA, every decision-maker on the plan — record-keeper, investment committee, even the employer — carries a fiduciary duty,” explained Lawrence Klayman, the founding partner of KlaymanToskes PLLC.
“That oversight gives savers two layers of protection: Assets are generally shielded from creditors and lawsuits, and if the plan is mismanaged, participants can seek restitution through the courts. Outside brokerage accounts rarely offer that kind of legal backstop.”
You’ll Be More Secure in Retirement
Ultimately, funding your 401(k) today will give you peace of mind in your old age. As Lu explained, your Social Security probably won’t be enough to live a comfortable life. Your 401(k) gives you that extra boost.
“Social Security will probably be insufficient to meet your own retirement goals alone, and using savings accounts with minimal interest will not suffice,” Lu said. “A 401(k) [account] will make sure that you’re laying the groundwork for an improved retirement with less monetary concern.”
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