Why college students should know about the 401k

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By Prof. John DeSpagna
Campus News

You may have heard of the term a 401k but are not really sure what it means. As you continue your college career, know that you will become part of the full time job market when you graduate. You will start asking questions about benefits such as vacation, tuition reimbursement, holidays and one of your most important benefits will be a 401k. Let’s learn a little about this now to be ready for the future.

The last thing on your mind now is probably retirement. But now is the time to learn about what you need to do so you can retire comfortably some day. You don’t want to be working at age 70 because you can’t afford to retire.

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In 1935, the Social Security Administration was established to give people a little something for when they retired. Today, the average social security monthly benefit is $1341 per month. Do you really think you can live comfortably on $1341 a month when you retire? When social security was set up, we had many employees paying into the system. With the Baby Boomers starting to retire, we have fewer and fewer paying into the system for its future solvency.

Fewer and fewer people have a monthly pension to help them pay for retirement.  The last several decades, the trend has been that it is incumbent on the individual to be able to pay for his or her retirement and not rely on others.

The 401k was created by Congress so you can contribute some of your paycheck on a pre-tax basis to a retirement account that will grow tax deferred until you start taking distributions.  You can contribute a percentage of each paycheck to the 401k and this will be taken electronically out of your account. Start small with one percent of your pay and you have the flexibility to increase your contributions as your financial position changes and you become more prosperous. The key thing here is to get started when you are young to allow for several decades of growth. You are always going to have expenses like college loans, a car payment, rent or credit card payments. You have to make the effort to start so you will have something for retirement.

How much can you put into this 401k each year? The maximum contribution for those under age 50 is $18,000 per year.  Start making a contribution and most companies will offer some type of matching program. They may match you dollar for dollar on your contributions. This is a benefit from your employer, so take advantage of this
The next step is to invest the money you put into the 401k plan. You will probably be investing this in some type of mutual funds. The mutual funds will be professionally managed and diversified to help you reach your retirement goals. I will discuss mutual funds in a future column.

Two of the issues you also have to face regarding your retirement assets are taxes and inflation. Uncle Sam is going to be an uncle that never forgets about you when you get paid and when you retire. The impact of taxes cannot be minimized along with inflation. The cost of goods and services tends to go up every year and you need to have your retirement assets grow. Being too conservative can result in taxes and inflation eating away at your assets. You need to make your assets grow and that will be a goal of the 401k plan.

You are at a phase in your life where you are investing in yourself by getting a college education to help you be successful. What better investment can you make? When you get out into the work world after graduation, start contributing to your 401k plan so you can comfortably retire someday.

John DeSpagna is a business professor at Nassau Community College in Garden City, New York.