The 4-1-1 on your 401k

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Most Americans will not have a traditional pension.

Workers have to take responsibility for their own retirement, and the main way to do it is through 401k plans. The most traditional type is through a kind of partnership that exists between an employee and an employer.

Employees set up automatic, pre-tax pay-roll deductions and most times, if the employee does that, the company will also make a contribution, called the company match.

“Even just ten dollars a day saved automatically through a 401k can benefit you with tens of thousands if not more dollars in the future that’s money that probably left to your own devices you wouldn’t have saved,” Farnoosh Torabi, author of You’re so Money said.

An example, if you make $100,000 a year and you put 5% of your salary away pre-tax, and your company puts in 4%, that means you will have put $9,000 aside for your retirement that year.

Sometimes people starting out in their careers are nervous about tying up so much money into an account that is not easily accessible. It is true that 401ks are meant for your future, not your present.

Something to remember: most financial advisers will tell you to avoid touching your 401k for any reason; if you withdraw funds from your 401k before your retirement, you will be punished. You’ll have to pay the taxes that you owe, plus a 10% fee.

For most people that means half the money goes up in smoke, which is why most advisers suggest you avoid this option. As Einstein said, compound interest is the 8th wonder of the world.

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