Guest commentary: It’s worth investing in a 401(k), especially in this volatile time
By Danielle Brinkman-Mallare
In today’s economic climate, uncertainty is the only certainty. Inflation remains high, interest rates fluctuate, and the stock market is prone to dramatic swings. Many Americans are feeling the pinch and wondering where to put their money to ensure long-term financial stability.
As a Certified Public Accountant, I can confidently say that one of the smartest financial moves you can make — especially in times like these — is investing in a 401(k) retirement plan.
A 401(k) is not just a retirement account; it’s a powerful financial tool that offers significant tax advantages, employer-matching contributions, and long-term growth potential.
Yet, despite these benefits, many people either don’t contribute to their 401(k) or fail to maximize its value. Given the current economic climate, it’s more important than ever to take full advantage of the opportunities this retirement savings vehicle provides.
UNBEATABLE TAX ADVANTAGES
One of the biggest reasons to invest in a 401(k) is the immediate tax benefits. Contributions to a traditional 401(k) are made with pre-tax dollars, which reduces your taxable income. For example, if you earn $75,000 annually and contribute $10,000 to your 401(k), you’re only taxed on $65,000 of income for the year. This can result in substantial tax savings, particularly for people in higher tax brackets.
Roth 401(k) accounts, on the other hand, are funded with post-tax dollars, meaning you pay taxes upfront but enjoy tax-free withdrawals in retirement. This can be especially beneficial if you anticipate being in a higher tax bracket later in life.
EMPLOYER CONTRIBUTIONS
Many employers offer to match a percentage of their employees’ 401(k) contributions. This is essentially free money. If your employer offers a 100% match on the first 5% of your salary that you contribute, failing to invest at least that amount means you’re leaving money on the table.
Consider this: If you earn $60,000 and contribute 5% ($3,000) to your 401(k), and your employer matches that amount, your total contribution for the year is $6,000. That’s a 100% return on investment before any market growth. In volatile economic times, securing an immediate return like this is invaluable.
STAYING THE COURSE
It’s natural to feel uneasy about investing when the market is unpredictable, but history has shown that time in the market is more important than timing the market. While the stock market may be volatile in the short term, long-term trends have consistently shown positive returns.
A 401(k) allows you to invest systematically through payroll deductions, taking advantage of dollar-cost averaging. This means you buy more shares when prices are low and fewer when prices are high, reducing the impact of market fluctuations over time.
If you’re feeling anxious about market downturns, remember that staying the course and continuing contributions can position you for greater gains when the market rebounds.
OFFSET SOCIAL SECURITY CONCERNS
Social Security benefits alone will not be enough to maintain most people’s standard of living in retirement. The latest projections show that Social Security’s trust funds may be depleted by 2034, leading to potential reductions in benefits unless legislative action is taken. Relying solely on Social Security is a risky bet.
A well-funded 401(k) ensures you have personal savings set aside, giving you greater control over your retirement years. It also provides flexibility, as you can decide how and when to withdraw funds based on your lifestyle needs.
SMALL BUSINESS ADVANTAGES
For business owners, offering a 401(k) plan can be a game-changer. It helps attract and retain top talent, as employees value benefits that contribute to their financial future. Additionally, small business owners who participate in their own company’s 401(k) plan can enjoy the same tax advantages and long-term investment growth as their employees.
New federal incentives are also making it easier for small businesses to start 401(k) plans. The SECURE Act provides tax credits to help cover the costs of setting up a retirement plan, making it more affordable for businesses of all sizes.
TAKE ACTION NOW
If you already have a 401(k), review your contributions and ensure you’re maximizing your employer’s match. If you don’t have one, enroll as soon as possible. Even small contributions add up over time, thanks to compounding growth.
Investing in a 401(k) is one of the most effective ways to secure financial stability for the future. In these uncertain times, it’s crucial to take advantage of every opportunity to build a financial safety net. Your future self will thank you.
Danielle Brinkman-Mallare is the owner of Brinkman and Company, AAC, an accountancy firm with offices in Oxnard and Ojai.
