This is the sixth part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #4 – Investment“.
The next article is “Financial Tools: Net Worth Tracker/Planner“.

Many times, I’ve heard that “401(k) is free money – you’re mad not to take it!” without really understanding what that meant. After all, a “retirement account” is money that you’re not going to see for 30-50 years… bo-ring. One day, though, you’ll want to retire, and doing so requires a significant investment socked away (current estimates hover around the $1m – $1.5m for true retirement comfort). What does a 401(k) plan get you?

Most plans have some form of employer-matching, so, to take a conservative example (my own company is actually more generous), a 15% employer match means that every dollar you put into your 401(k) immediately becomes $1.15. That means that, even if your 401(k) does nothing at all, you’ve already made a 15% return on your investment on day one. In addition, 401(k) deductions are pre-tax, so a contribution of $500/month works out to appear as a much smaller “dent” in your paychecks (somewhere around $360, depending on your tax situation).

In reality, even a fairly conservative 401(k) portfolio should make 8.5% per year, on average (we’re thinking long-term – 30 years or more here, so individual market ups-and-downs should even out to a good growth rate). This means that in just a year of $500/month contributions, with an employer-match of 10%, your $6000 pre-tax contribution (about $4300 in wages you’re no longer seeing) should be worth in the region of $7150. And the real beauty of this is that the interest you earn is compounded, so as the “capital” in the account grows, every cent is re-invested to begin earning its own percentage gains.