In a very real sense retirement planning and estate planning are two of the basic responsibilities that go along with being a self-supporting adult. If you don’t plan for the future no one is going to do it for you. Those who enjoy a comfortable retirement with the peace of mind that comes with knowing that they will be leaving behind a suitable legacy generally are not in this position due to dumb luck. For most people it requires intelligent long-term planning and fiscal discipline. The wise course of action is to set goals early on and stay the course over a number of decades until you ultimately reach your objectives.
The fact is that most individuals are introduced to retirement planning and estate planning on a rudimentary level when they enroll in the benefits plan offered by their employers. Your life insurance coverage is a basic estate planning component, and in most cases you will be offered an opportunity to get started saving for your retirement via participation in a 401(k) plan.
A 401(k) is a savings account of sorts that allows you to contribute into it with pre-tax earnings. As the account grows over the years any interest accrued by the investment is not taxed. So, while you’re saving for the future you also gain tax benefits each year. For example, if you earned $40,000 in gross income and contributed $2,500 into your 401(k) that year your taxable income would be reduced by that amount, making it $37,500 rather than $40,000.
Another opportunity that often exists with the 401(k) is that many employers will match employee contributions into the fund. This is in essence free money being offered to you and financial advisers will always recommend that you take advantage of it.
There is another type of 401(k) called the Roth 401(k) that is appealing to many people. With this plan you deposit after-tax earnings, but when you eventually receive distributions from the account they are not subject to income tax. With the traditional 401(k) you do pay income tax once you start to take distributions.