Don’t panic! You’re not alone. Living paycheck to paycheck is, unfortunately, all too common. We love that you want to take advantage of your employer-sponsored 401(k) and its valuable benefits like reduced taxable income and tax-deferred gains on your investments.
While topping off your 401(k) is ideal, a little something is always better than nothing. Harness the power of compound interest! Even a 1% contribution to your 401(k) will go a long way!
Peter Planner works full-time as a groomer for Fluffy Friends, and earns $30,000 per year. He’s currently 22, and aims to retire in 40 years at age 62. If Peter never receives a raise for the next 40 years, he will earn $1,200,000 (before taxes) over the course of his career.
Peter contributes 1% of his annual income or $25/month to his 401(k). With the magic of compound interest, Peter will have accumulated $60,264* in 401(k) assets or the equivalent of 5% of his estimated lifetime earnings with a 1% contribution.
Really, truly, strapped for cash right now? We get it. Set a reminder to check in with yourself every few months to reassess your financial situation. You can always change your contribution to your 401(k) plan at any time. Need some relief? The IRS offers a tax credit for some folks who might be struggling to find the cash to set aside for retirement. Check out our article "What's a Saver's Credit and how can it help me save more?" to learn more.
*assuming a 7% average rate of return