This Post is being written at the suggestion of my thirty-something daughter. She works for a S & P 500 Corporation and has two young, new colleagues who she had encouraged to start contributing to their Company-Sponsored 401(k). She conferred with me afterward and we figured that there are, no doubt, other young people starting in Today’s Workforce who might benefit by some ideas. Keep in mind that, when someone calls their Human Resources (or Personnel) Dept., the Person who takes the call generally cannot provide any real advice.
As much as possible, it would prove helpful for Young Men and Women to get some College Education, attend a Trade School or enter into an Apprenticeship. Having Skills to bring to a Job provides a definite advantage–in Job Opportunities, a Fulfilling Career Path or Lifetime Compensation. That’s why they would generally have a Lifetime Advantage over people who do not have such skills. Remember that many of the jobs that used to go to High School Graduates are precisely the ones that are being Sent Overseas.
People who are new to the Labor Force are often unmarried and not encumbered with a Home, Mortgage, Spouse and Children. That means that they might have a bit more Income to contribute to such Plans. Accordingly, if the Employer has a 401(k), or some other “Qualified (meaning Tax-Deferred) Plan”, Employees should certainly contribute, if they can. Such Contributions can reduce Federal Income Taxes that they would pay.
If the Employer contributes “Matching Funds” (generally for several percent of what the Employee contributes), it is most important that employees at least contribute enough to have those funds added to their Plan. There are other reasons to contribute as soon as possible: the compounding of contributions invested over the years; the Nest Egg built-up even if the Participant has to stop contributing and the ability to borrow from a 401(k).
Many 401(k)s enable the Participant to borrow from it. Over the past several years, when Bank Loans dried-up for many people, being able to borrow from your 401(k) would be a source of available funds. The Plan Document would indicate whether Loans are allowed. Such Loans are not taxable events and the amount available would be based on the individual’s Plan Balance. In effect, the Participant would generally be paying interest to themselves.
Another key point is that some new entrants into the Workforce, still live at home. Given the slow Recovery from The Great Recession, this is even more the case today. So, if you live at home or your Health Insurance can be covered on a Parent’s Plan up to Age 26 (under the Affordable Health Care Act), that might provide a bit more of spendable Cash–either to contribute to the Retirement Plan or start an Emergency (or Rainy Day) Fund.
Starting contributing early to a Retirement Plan will hopefully become Habit-forming. Once the Employee learns that they can, indeed, put some money aside, they get by spending a little bit less. Since the Retirement Plan Contribution is deducted before you receive it, the Process can be painless. Also, (hopefully) Annual Raises might provide for an increase in the Contribution. The Plan Document would note what the maximum is. Lastly, seeing your Fund grow over time can even be motivation to do even more.