How the 401k affects your net worth
The 401k is the most important part of your net worth and can boost it by quite a lot, especially if you let it grow without withdrawing money and take advantage of employee matching.
According to Fool.com, the average household net worth in 2022 was $192,700, with White and Asian households leading the charge. Unsurprisingly, as Americans get older, their net worth increases as well.
Unfortunately, net worth is also greatly affected by race, with White Americans having a net worth that’s six times higher than Black Americans and five times higher than Hispanic Americans.
The question arises, is 401k included in net worth? The answer is a vehement yes!
What Is Net Worth?
Net worth is calculated by subtracting all of your liabilities (mortgages, loans, credit card debt, etc) from your assets (cash, investments, properties, retirement accounts, etc).
Your 401k will be a part of your long-term assets, and is usually the biggest part of most Americans’ asset count. Keep in mind that you usually cannot access the 401k assets before retirement age, but it’s still an important asset to contribute to.
Learn more about the average net worth by age at Empower | The Currency.
How Does the 401k Help With Net Worth Gains?
For many workers, the 401k grows steadily over decades through:
- Regular payroll contributions
- Employer matching contributions
- Compound investment growth
Compounding has been named the 8th wonder of the world for very good reason. If you regularly contribute to your 401k and let it grow without interfering (without letting fear get in the way), then your net worth will have a chance to grow unfettered.
The brilliance of compounding effect over a long period of time is that even small contributions in your early 20s can result in big gains in your 60s and 70s. Staying steady on course and contributing small amounts consistently is key here.
Eventually, your 401k can surpass even your mortgage and other assets, because of the magic of compounding.
What Are the Tax Advantages of 401ks That Relate to Long-Term Value?
The biggest advantage that 401k offers in building your net worth is the tax advantages it offers.
In a traditional 401k, you will be contributing pretax dollars, which means that your taxable income is reduced now, allowing you to invest more upfront. When you retire and start withdrawing money, that’s when you start paying taxes at a lower rate on your withdrawals.
In a Roth 401k, contributions are made after taxes, but qualified withdrawals are tax-free. While this doesn’t lower current taxable income, it can significantly enhance after-tax net worth in retirement.
Both are great ways of boosting your assets and retirement income.
Are You Taking Advantage of Employee Matching?
If you work for an organization that offers employee matching, then you should absolutely be taking advantage of it. When an employer matches part of your contribution, that match immediately increases your net worth, often by thousands of dollars per year.
Failing to contribute enough to earn the full match is essentially leaving money on the table, slowing the growth of your overall financial position. Make a note in your to-do list to speak to HR about employee matching as soon as possible. Stop wasting this important way of gaining strides in your net worth.
How Does Market Performance Affect Net Worth?
You are essentially going to be investing your 401k into stocks, bonds, and mutual funds. As the stock market goes up and down, your 401k value will change as well.
However, the most important thing is to stop worrying about this short-term volatility and focus on the long-term gains of your net worth. As time goes on, even despite the short-term ups and downs, your 401k will grow in value. Staying invested and avoiding emotional decisions helps protect and grow net worth over time.
Loans and Withdrawals Can Reduce Net Worth
Many Americans take advantage of the option to withdraw money from their 401k for hardships or for home improvements. If possible, avoid withdrawing money from your 401k
The only way your 401k can grow over time is if you keep on contributing to it and let it grow without any interference. Stop reducing long-term net worth by withdrawing due to these reasons:
- Interrupting compound growth
- Triggering taxes or penalties
- Increasing future financial risk
If you do take out money from your 401k, pay it back in as soon as you can.
Frequently Asked Questions
Should You Pay Down Debt First or Contribute to Your 401k?
The key here is to focus on the type of debt you have. If you have a mortgage, then paying it down faster may not be a good idea, since the interest rates are pretty low.
However, if you have credit card debt with a really high interest rate, then it’s better to pay that down first, before contributing to a 401k. Speak to a financial planner if you aren’t sure.
Are Retirement Accounts Liquid?
Retirement accounts aren’t as liquid as cash, of course. That’s the whole idea. You don’t want to be taking money in and out of your 401k.
The 401k essentially forces you to put money into a growing pot and leave it undisturbed for a long while to come. It’s the best way of growing your net worth, and you should really not be interfering with it.
However, limited liquidity means your net worth may appear strong on paper, while available cash is tight, which highlights the importance of balancing retirement savings with emergency funds and other liquid assets.
Have an emergency fund of 3-6 months sitting around in a cash account, even before you start contributing to your 401k. This is the basics of financial health.
Is 401k Included in Net Worth? Yes!
Now you know the answer to the question, “Is 401k included in net worth?”
Make sure you are contributing regularly to your 401k and do not withdraw money from it unnecessarily. Also, take advantage of employee matching, if that’s an option for you. Don’t leave money on the table.
Read through related articles on our website to stay informed.
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