I just hit a new milestone in my 401K: my investments have surpassed 250K in value! It’s been amazing watching the account value grow over the years. I started contributing into my 401K in October 2011, when I joined a new company almost 7 years ago. I started off with the default 3% contribution from my paycheck. Then I slowly ramped up my contributions, just 1% every few months. We modified our lifestyle to adjust to the decreased take home paycheck. I finally started maxing out my 401K in June 2014 (maximum was $17,500 per year then).
A 401K is a retirement savings plan sponsored by your employer that allows you to contribute part of your paycheck towards your retirement before taxes are taken out. Contributions into your 401K lower your adjusted gross income, which may lower your tax liability. For more information regarding 401Ks, read this Investopedia article.
When I first started contributing to my 401K, I could not even fathom that it would grow to this amount. Through market ups and downs, I just stayed the course making regular contributions into my account with each paycheck. When the market pulled back, I was able to pick up more shares of index funds for less money. When the market reached all time highs, I picked up less shares at a time.
There were times I thought about moving my investment balance into safer funds like bond indexes or fixed value portfolios. Fear mongers have predicted stock market crashes over the last 5 years; I am glad I ignored the noise and stayed the course. Even if you only invested at market peaks, staying the course with your investments and not panicking when the stock market has a crash or correction, you’d still end up fine.
More often than not, the stock market will be at new all time highs. There is no way to accurately time and predict when the next crash or bull market will occur. Time in the market is much more important than timing the market. Investing in a 401K consistently puts money into your account with each paycheck, whether the market is up or down. This bull market has really helped boost our investment returns. When a balance gets this high, it’s not uncommon to have greater investment returns in a day than my paycheck after 2 weeks of work! The opposite is true as well.
If your employer offers a 401K, I highly recommend contributing to it. It’s the best way to consistently invest on autopilot. And since your contributions are taken out of your paycheck directly, you won’t miss the money when you get paid. If your company offers a match, definitely contribute to it. Saying no to a 401K match is turning away free money. Match contributions from your company do not count towards your maximum individual contribution amount. Even if you can’t max out your contribution, try to increase your contribution rate by 1% every few months.
My 401K is 90% invested in 3 funds designed to mimic VTSAX, the Vanguard Total Stock Market (71% S&P Fund, 6% Vanguard Mid Cap, 13% Vanguard Small Cap Growth) as well as 10% into a Vanguard Health Care index.
No matter how the market does, I will continue to max out my 401K contributions. Our financial freedom depends on it. Are you investing in your 401K contributions?