In the Black: The Value of the 401(k)

By Nick Newton.

Do you invest in a 401(k)?  Take the poll.

Life is full of little pleasures: the first time your child says your name, the long-awaited success of a friend, and becoming eligible to participate in the company 401(k). Yes, that’s exactly right…participating in the company 401(k) is ripe with an emotional and financial payoff.

All of us are keenly aware of the roller coaster ride the markets have provided over the past few years. Chronic unemployment, banks’ reluctance to lend, and the unwillingness of consumers to spend have made investing a very daunting challenge. And while it is counterintuitive, this is the precise moment to continue to plow money into your 401(k)…maybe with an enthusiasm you have not demonstrated in previous years.

Here’s why:

1) The stock market is the primary wealth transmission vehicle in the world. As the value of stocks and 401(k)’s climb, all of us feel a little better off and that is good for the collective psyche.

2) It is perhaps the most systematic way to reward yourself for your many hours of hard work. The old adage “pay yourself first” will never go out of favor. The 401(k) is perfect in this regard. Before a single dollar can be distributed, you must first pay yourself through the contributions. But you must be enrolled in your plan.

3) Your 401(k) gives you a great reason to watch CNBC and moan about the state of the economy, and it provides you a stake in the global financial landscape.

4) It sets a wonderful example for friends, family and loved ones.

As we near the end of this year and reflect on the past few, take the opportunity to review your 401(k) allocations. If by chance there is not an allocation to review, consider making the 401(k) contribution a new year’s resolution and take advantage of the company match should one exist. Give yourself a chance to reduce your tax burden, and treat yourself to one of life’s most under-appreciated little pleasures.

Nick Newton is Senior VP at Waddell & Reed Investment Management Company.
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