It is important to look at the big picture if you want to be prepared for each and every phase of your life. While it is true that we are all constantly dealing with the matters of the present, the wise person does this with an eye on the future.
If you plan on retiring at 65 you have to understand that you may well live for two decades or more after you stop working. It may seem like overstating the obvious, but you have to somehow finance this long stretch of time. As self-evident as this may appear, many people don’t get the idea until it is too late.
Recent polling indicates that 24% of baby boomers nearing retirement age have no savings at all, and 64% of them say that they will be relying on Social Security as the cornerstone of their income during retirement. In 2010 the average Social Security payout was $1,072 a month. Unless you have extremely low expenses this is simply not enough to live on comfortably.
The good news is that most workplaces that provide benefits offer 401(k) accounts that are intended to provide retirement income, and many times your employer will match your contributions. This matching contribution is nothing more or less than free money, so it is a good idea to contribute the maximum amount that your employer is willing to match.
From a tax perspective, the interest earned by your 401(k) account is not taxed, and your taxable income is reduced by the contributions that you make into the account each year. It should be noted that you can start to make withdrawals when you’re 59 1/2 years old, and these distributions are subject to income tax.
However, there is another type of 401(k) called a Roth 401(k) account. With these accounts your contributions are made after taxes, but withdrawals are not subject to income tax, and this is appealing to many people.