Why Participate in a 401(k) Plan?

There are many reasons – here is one:

After a 30-year career as an administrative assistant at a company, a woman retires from her professional career at the age of 65. This woman is now living alone, children have long since moved out on their own. Monthly expenses are $1,280 and her sole source of income is a monthly Social Security check for $983. The monthly financial shortfall is only made more painful with each new health concern that comes on an uninvited basis as she ages.

On occasion, this woman reflects on her life, while no deep regrets, she often thinks if she could have a do over, she would have made a greater effort to prepare for these golden years.

While none of us gets to travel back in time, if this woman could, let’s make one change to her life and see if she can Make Life Better. Beginning at the age of 30, through her company’s 401(k) Plan she saves a total of $1,000 on an annual basis. Every five years, this woman increases her annual savings into the 401(k) Plan by $500. The last five years of her career she is saving and contributing to her 401(k) account $3,500 per year. Assuming an annual rate of return of 6.5% for her 401(k) money, this woman retires from her professional career with a 401(k) balance of $156,916.

Beginning at the age of 65 she withdraws $500/month from her 401(k) account. Every year the amount this woman takes out of her 401(k) Plan is increased by 2.5% to compensate for inflation. Now at the age of 82, she receives her monthly check from Social Security of $983 while also getting an additional $742 from her 401(k) portfolio for a total monthly income of $1,725. After subtracting her expenses of $1,280, she has $445 to provide much needed financial breathing room. In addition to having money left over at the end of each month, this woman’s 401(k) balance now totals $221,770, assuming a 6.0% annualized rate of return.

What a difference one adjustment could have made for this woman. Fortunately, for this woman, her children are able and willing to help her make things work financially. But the lesson remains for each of us – our future will happen, and we have the power to shape it into a future we want to live.

So, why participate in a 401(k) Plan? To Make Life Better!