Most people make the common mistake of automatically joining the 401k offered by their work. They may have a variety of reasons, including consolidating their retirement funds. Did you know that most 401k plans have hidden fees, called operating expenses?
In general 401k plans, have higher expenses than a typical personal IRA would have. For this reason, the major reason to actually contribute to your work's 401k plan would be if they offered a match.
It is common for an employer to offer a 4% match, meaning that if you contribute 4% of your salary towards your 401k, your employer will match that 4%. Now here's the kicker. If your employer matches 4%, you often need to contribute more than 4% in order to take full advantage of the free money they are offering.
Here's why. Suppose you earn $60,000 per year and you start contributing 4% towards your 401k, due to your employer match. Well, if you earn a $5,000 starting bonus and another $2,000 end of the year bonus, you will miss out on $200 because you didn't factor in the additional $7,000 in compensation ($7,000 * .04 = $200).
Over time, and over jobs, these little details can add up to thousands of dollars.
This post was reposted from http://finlit.biz/retirement-2/a-common-mistake-when-entering-a-new-job/, originally written on January 12th, 2013.
No comments:
Post a Comment