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Frequently Asked Questions: 401(k)

How to increase your 401(K) money
(How to Retire Rich and Happy)


You need to be actively involved in your 401(k) plan. The amount of money waiting for you at your retirement depends on your actions today. There are three things you can do to increase your retirement money:

1. Take all the money allocated to you.
Most employers allocate a certain amount of money for you to take if your help yourself. If you don’t take the money given to you, you are throwing away that money. To help you save for your retirement, most employers will add 50 cents for each dollar you put into your retirement account up to a certain percent of your salary. Uncle Sam also helps you. You do not have to pay income tax now for the money you put aside for retirement. If you are in a 20% tax bracket, you are actually getting 20 cents from Uncle Sam.

2. Start early.
The magic of compound interest will make you smile at retirement. Compound interest is interest earning interest. Together with your continued contributions, your account will increase substantially.

For example, the following table provides a comparison of interest earnings for an employee earnings $36,000 a year making 6% contributions to a 401(k) plan with employer contributing 50 cents for each dollar. We assume this employee’s investment choice yields an average of 8% investment earnings. We do not take into account future pay increases nor inflation.

Start Age Your Annual Contribution Company Match Total Interest Total at age 65
25 $2,160 $1,080 $709,700 $839,300

In this example, an employee started contribution at age 25 will pay a total of $86,400 ($2,160 x 40) , will receive $43,200 from his/her employer and $709,700 from interest for a total of $839,300 at age 65. Where else can you get this kind of investment return?

3. Leave the money alone and invest wisely.
You should try to avoid borrowing or using money in your 401(k) account. 401(k) money is meant for retirement and learn how to invest for long term. For example, the total value at age 65 is very different if you are able to increase the average annual investment return from 8% to 9%. The following table shows the results at 9% interest return.

Start Age Your Annual Contribution Company Match Total Interest Total at age 65
25 $2,160 $1,080 $965,100 $1,094,700

You get an extra $255,400 ($1,094,700 - $839,300) bonus. It is never too late to start. However, the earlier the better. Let the magic of compound interest work for you!

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