Your 401(k) makes it easier to save
Select a contribution amount and your money goes right from your paycheck to your plan. These automatic contributions continue paycheck after paycheck, so your savings can add up fast. Even better, putting away part of your pay is a relatively painless way to save—you might not even notice the difference.
You can save pretax or post-tax
Contributions to a traditional 401(k) are taken directly out of your paycheck before federal income taxes are withheld. Because the contributions are pretax, your total taxable income is lower—which means you might owe less in income taxes each year you contribute. Your pretax contributions are then tax deferred until you choose to withdraw them in retirement.
As an alternative, your plan might also allow you to make Roth 401(k) contributions. With a Roth account, you contribute after-tax money, but the growth of your savings is tax free.
And keep this in mind: The IRS’s limits for 401(k) pretax and after-tax contributions tend to increase each year, potentially giving you more opportunity to save on a tax-advantaged basis. Talk to your tax advisor about which approach—or combination—is best for you.
You tap into the power of compounding
When you contribute to your plan, your money can generate earnings, which can either compound or go back into your account. This gives you more money to generate additional earnings, which are also added to your account. Over time, compounding can have a significant impact on your retirement. Use our calculator to see what compounding can do for your savings.
The variety of 401(k) investment options makes you an investor—not just a saver
Given how expensive retirement can be, saving for the future isn’t enough. You need the growth potential that comes with investing. Projections show that a couple, each of whom is 35 years old, could be facing more than $500,000 in healthcare expenses during their retirement years.¹ And that’s just a slice—for many, a very big slice—of the total cost of living. Most 401(k) plans offer bundled investment approaches you can choose with one simple decision, including target-date funds and professionally managed accounts. If you prefer to really dig into investing, your 401(k) includes the learning opportunities, in-depth information, and investment choices to help you along the way.
It could help improve your financial wellness
These days, many 401(k) plans offer financial wellness benefits, convenient tools, education, and resources for fine-tuning your budgeting, saving, and borrowing habits; some even extend the opportunity to other family members, including kids. When asked what prevents them from saving more for retirement, 35% of employees said poor spending habits, while 33% blamed credit card debt.² Financial wellness benefits can help remove these roadblocks and more. (Read more about the challenges that Gen Xers and millennials face.)
It’s designed to suit your busy lifestyle
Whether you prefer to put your plan on autopilot or take a hands-on approach, it’s probably possible with your 401(k) plan. For the set-it-and-forget-it approach, many of today’s plans allow eligible employees to enroll automatically and let them preset yearly increases for the amount they save. For do-it-yourselfers, many plans offer the same high level of information, planning resources, and account management resources available to retail investment customers.
You can take it with it you
Even if you change jobs, the money you’ve contributed to your 401(k) plan and its subsequent earnings belong to you. Depending on your plan type, there are different ways to keep your retirement plan invested and growing on a tax-deferred basis. If you’ve left an employer but still have an old 401(k) plan with them, find out what your options are for moving your money to your current plan, leaving it where it is, or rolling it into an IRA.
1 “Health-care Costs in Retirement Continue to Rise—Here’s What You Need to Know,” MarketWatch, 4/11/19. 2 John Hancock's fifth annual financial stress survey, John Hancock, Greenwald & Associates, June 2018. A survey of more than 1,300 workers to learn more about individual stress levels, their causes and effects, and strategies for relief.
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. John Hancock does not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made. There is no guarantee that any investment strategy will achieve its objectives.