Years ago, it was common for employers to offer a pension plan to support workers after they retired. Over the past few decades, however, most employers have stopped offering pensions, and many offer a 401(k) retirement plan instead.
With a 401(k) plan, you are in charge of your retirement account. That means you are in charge of how much money you will have in retirement. While that may seem intimidating, the biggest step is simply to start contributing to your plan.
And remember, you don’t have to go it alone. A financial planner can help you make decisions that reflect your goals and risk tolerance.
How a 401(k) plan works
In general, a 401(k) is a retirement account that your employer sets up for you. When you enroll, you decide to put a percentage of each paycheck into the account. These contributions are placed into investments that you’ve selected based on your retirement goals and risk tolerance. When you retire, the money you have in the account is available to support your living expenses.
Your contributions are tax-deferred
Your 401(k) contributions are deducted right from your paycheck and go directly into your account before taxes are withheld. So if your salary is $50,000 a year and you contribute $3,000 to your 401(k), you will pay income tax on $47,000 next April instead of the entire $50,000 that you earned.