One last type of investment to learn about is your retirement investment. Even though retirement is decades away, it's a good idea to start thinking about it now. Remember that investing for retirement is an important financial goal. When would you like to retire? What would you like to do? How much money do you think you will need? Look at these investment options:
One option to consider for retirement investing is an employer-sponsored retirement plan. When you start your job, your employer may offer you participation in a retirement plan called a 401k. This plan lets employees set aside a portion of their wages. A 401k plan is offered by private and public businesses. A 403b is the same kind of plan offered by tax-exempt organizations. Some employers may also match a portion of the money you invest with no additional cost to you. The average employer match is 4%, meaning for every dollar you invest in the plan, your employer adds 4 cents. This is basically free money!
The investing process for retirement is similar to other investments. You choose investments—which are usually mutual funds, stocks, and bonds—then the money is invested for you through the employer's plan. The money is not taxed until you withdraw the funds when you retire. Your employer may require you to work at the company a certain number of years before you can collect the employer contributions.
Review the boxes below to learn more of the advantages and disadvantages of 401k and 403B investments.
Advantages
- Tax benefits – Funds are not taxed until you retire.
- Employer contribution matching – Employers match up to a certain percentage of your money.
- Automatic paycheck withdrawal – Money is taken directly from your check and deposited into the 401k/403b.
Disadvantages
- Limited investment choices – Employer plans may not offer as many choices as an investment firm.
- Vesting period – Your employer may require a certain amount of time working at the company before you can collect their contributions. Once you're fully vested, you can take the entire company match with you if you leave the job.
Now that you know some advantages and disadvantages of 401k and 403b, help your friend Emily with her financial decision.
Question
Emily's employer offers her a 401k plan with a 4% match. Should she participate in the 401k?
If your employer offers a 401k or 403b, that is the best investment option because your money is not taxed until you retire. Also, some employers will match your contributions up to a certain percentage, which means free money for you!
