When you’re in your early twenties and you’ve just landed that first salaried gig with benefits, retirement tends to be the furthest thing from your mind. On one hand, it’s something that you know you should be savings towards, but on the other, it feels as though you have plenty of time to get your house in order. Additionally, many people didn’t have the privilege of taking personal finance courses in school, which means that retirement investment options can feel extremely foreign and overwhelming.
One of the most common retirement plans we hear about is the 401(k) plan. It’s offered as part of a benefits package by many employers so we sign up because someone told us that we should. We choose the most conservative investing option. And then, we let it sit without ever truly knowing how it works or how we can better optimize our funds to ensure financial comfort in our golden years, which is almost as bad as not investing at all.
When it comes to investing, knowing how your investments work, and establishing a solid game plan is a major part of building wealth. Sadly, according to a 2019 ValuePenguin survey, nearly two-thirds of Americans are confused about 401(k) plans and how they work. As a result, we set out to demystify the 401(k) with some help from Bankrate reporter and financial analyst, James Royal. So let’s begin with the basics.
What is a 401(k)?
“Basically, a 401(k) is an employer-sponsored retirement plan,” shared Royal. “And what it does for you is it allows you to grow a contribution that you make as an employee.”