Make Ends Meet with a 401k

LOUISVILLE, Ky. (WAVE) - In 1978, the 401k was born as a retirement savings and investing plan that employers offer employees with tax breaks that help them save.

Most have dreams of leaving their jobs behind at some point and enjoying the retirement lifestyle they have been dreaming of but don’t know how to reach their retirement goals. Gregg Murset, a financial planner and the CEO of Busy Kid, said reaching that goal won’t happen by accident and requires work.

“Saving, sharing and spending,” Murset said as he talked about what he calls a balanced financial approach. “Every time you earn money, you gotta save a little bit of it. You’ve gotta share a little bit of it — a charity or church or something you care about — and spend the rest.”

Data from the United States Census Bureau shows at least 79% of working Americans can participate in a 401k, but only 32% of Americans are using the employee-sponsored retirement plan. Not everyone who is offered an employer-sponsored plan takes advantage of it.

“If somebody who is 25 starts to put away 50 bucks a week — or call it $200 a month — and does it until they’re 65 at a growth rate at 10%, that’s going to be literally $1.2 million” Murset said.

“Time is money,” as the cliché goes. Those who start saving 10 years later will get less than half of that potential chunk of money.

“They wait until they’re 35 and start putting that same amount of money away, that $200 or $50 a week, they’re gonna have $450,000,” Murset said.

Saving money can be harmful when people don’t know what they’re doing, he said.

“I think that’s why it’s so important to start teaching the next generation,” Murset said. “The first time they hear about a 401k is like when they get their first job.”

A company that matches a 401k at any percentage can mean even more money in a person’s pocket. Many employers offer to match what is put into a 401k up to a certain amount. It’s up to an employer to decide what percentage they will match, but many companies offer a dollar-to-dollar match.

“That matching contribution is free money,” Murset said. “I mean, it’s literally a built-in return on your investment. If you put in 6% of your pay, they’ll put in 6% of your pay. That’s a 100% return just like that.”

Contributions to a 401k are pre-tax and a person’s savings grows tax-deferred if it stays in the plan.

“It automatically comes out of your paycheck,” Murset said. “You don’t have to do anything about it. As you get older, you get more conservative, but when you’re younger, take a little risk and capitalize on those big returns.”

The contribution limit on how much can be placed into a 401k each year is set by the IRS and is subject to adjustment each year. For 2021, the contribution was capped at $19,500, not including an employer’s contribution to a person’s 401k.

Those 50 and older may be able to make a catch-up contribution. That is an additional contribution that can be made to a 401k retirement plan to make up for money a person may not have been able to contribute to their plan early in their career.

Age also makes a difference in asset allocation. Those who are younger can tolerate a higher level of risk than they can as they get closer to retirement. Those who are close to retirement may have more money to invest but have less time to recover from any losses they may incur.

Murset also said the “earn and burn” philosophy of getting a check and spending the money right away can be very harmful.

“If they’re going to just do the earn and burn philosophy where they earn money and burn it as fast as they possibly can, they’re never gonna make any headway,” he said. “You have to get rid of the earn and burn philosophy and use a balanced financial approach.”

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