When I left my previous employer to become self-employed, I also left behind the retirement plan that employer sponsored. While I ended up rolling the plan over into an IRA, I no longer had employer matches to any contributions I might make.
Now I'm not a big fan of the stock market, but I'll admit, there can be advantages to having a 401(k) or similar employer-sponsored retirement plan. While it's impossible to predict exactly all the ups and downs of the market, let's say the market only just manages to break even over next 35 years until I'm near retirement, even with this market stagnation, I could still be hurting myself by having lost my 401(k) plan.
The thing that I probably miss most about my employer-sponsored 401(k) is the employer match. That was the great part about such a plan. Since my employer matched my contributions at about 60 percent of each dollar that I contributed, if the stock market plummeted, I could take a huge hit to my plan and still not lose any of my own contributions (which actually happened during the financial crisis).
Employer contributions were kind of the silver lining of such a plan when the market took hits. I could just think of it as losing my employer's money rather than losing mine. Even if the stock market hadn't done a thing over the next 35 years until I'm closing in on retirement, at their matching rate, the amount my employer would have contributed to my plan would have equated to at least $50,000.
Let's stick with the premise that the stock market doesn't move a muscle -- doesn't go up or down one percent -- over the next 35 years. Well, that's fine, but one of the major funds to which I was contributing in my plan was a safer bond fund that I eventually moved to a stable income fund that pays out monthly dividends that equate to about .5 percent of my account total each month or about 6 percent a year. This means that the money I could have continued to pump into that fund (including my employer match) would have continued to grow at possible 6 percent a year even if the market held steady. At this rate, just my employer contribution alone would likely have been worth over $150,000 by the time I reached retirement.
Then there are the tax savings I'm missing out on. Sure, I could get those same savings through contributing to my privately funded IRA; however, due to a lowered income as a self-employer person, I'm not. With my 401(k) contributions going into that retirement fund at a pre-tax rate, saving me around 20 percent of every dollar invested in the near-term, it was a significant addition to the amount of money being put toward retirement savings.
The difference now in self-employment is that any money that I make from work that goes into a checking or saving account goes there after it has been diminished by taxes. While I will have to pay taxes on that money sooner or later, if I could allow it to work for me tax deferred, and then at the six percent dividend reinvestment rate my 401(k) income fund provides, the savings could add up even further.
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