Retire with dignity. Don't want to rely on spam sandwiches and off-brand prune juice in your old age? Retirement savings are pretty much a must. The government, for all their stupidity, actually realizes this fact, and allows for savings beyond the very flimsy Social Security system, in the form of a 401k retirement system.
The Roth 401k was created back in 1978. The 401k is a "defined contribution plan," meaning that the money put in by the employer and worker are defined. It is not a "defined benefit plan," where your boss would be on the hook for investment return minimums. That is, if you worked for the government and had their version of a 401k, you would qualify for a minimum stock market return, whether the market did well or poorly. The taxpayers would make up the difference to whatever minimum your union had negotiated for you. Lucky you.
A lot of people choose a 401k because most employers will match contributions. For every buck you put in, your employer may give you another buck—until you retire. It's like a twofer on your investing dollar before you even start investing the dough, and it's probably the closest you're going to get to free money from your boss. The key idea behind a 401k plan, in whatever flavor you invest, is that the investment, in whatever amount it ends up being when you retire and begin withdrawing cash from it at the mandatory 70-1/2 distribution age, is that the money withdrawn at that point is taxable as ordinary income. Why all the bother to defer your money if you're going to be taxed on it anyway? Because most people pay a much higher marginal tax rate in the glory days of their 58-hour-a-week work careers, and pay a much lower percentage rate when they need less money in their old age, when instead of worrying about paying their kids' college tuition, their dreams revolve mostly around new dentures.
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Finance: What is a 401(k)?51 Views
Finance a la shmoop... what is a 401k plan? okay say it with me tax deferred savings
that's it it's really not all that complex for the fancy numbers there all [Complex formula scribbles]
right well when you make money at work you get to defer the tax that you'll pay
on your income or earnings to be paid much later in life and you get to invest
that dough and let it ride tax-free until you take it out of your 401k plan [Money coming out of deferred savings piggy bank]
brokerage account and then at that point well you'll pay ordinary income tax on
your gains well the 401k was a part of the tax code
that was put into motion in the 1980s as the government began to painfully
realize that Social Security wasn't all that secure and that a whole generation
of people who had paid money into Social Security wouldn't get anything back so [People protesting outside the white house]
the government opened the door and made it easy or at least easier for the semi
wealthier masses to save money for their retirement and this was a new idea at
the time a whole new concept like a flying car before then it was mama [Man talking and flying car goes by a window]
corporation who managed the pension money for her employees you know that
sucking off the corporate teat and all that stuff well it fostered a sense of
long-term lifetime loyalty to the company and was all just very you know
IBM like a born in pinstriped blue diapers IBM employee with a hard loyal [Baby boy playing with a flashing rattle]
workforce working away there toiling in the IBM salt mines for 35 years
then retiring at 60 and having smoked a lot dying at age 65 and then that was
all she wrote well that was then this is now it's a different era different
financial pressures so companies don't generally offer pensions today and they
don't generally manage them themselves because the cost of buying real talent
like people who consistently beat the stock market in good times and
bad managing that 401k money is astronomically expensive and generally [Boxing gloves punching the stock market]
speaking corporations can't afford to pay those people nine times whatever
the CEO makes so companies generally contribute some amount of money to a
401k and then they leave it up to the employees to figure out how they want to
invest their retirement savings on their own and that's a good thing most of the
time and you know hopefully it's there when they want to go take it out and
they need the money when they're old and decrepit like like I'm getting...
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