Lets say youve started your first job.
Or, maybe, youve simply started to think about saving for retirement.
Heres everything you better know.
What is a 401(k)?
You have the option of investing in a variety of assets (i.e.
stocks, bonds, mutual funds).
Over time, your money grows.
Ideally, when you retire, youll have a big stack of cash thats been growing for years.
Why do I want one?
Saving even $50 a month can help you.
This is basically free money.
Of course, youll eventually have to pay taxes on this money when you retire.
How do I pick my investments?
When you open your 401(k), youll have to choose your investments.
Your employer usually works with an investment broker to come up with a list of options.
This means youre stuck with the list they offer, and sometimes, the list isnt great.
Target-date funds:These funds are pretty simple.
You pick your target date for retirement, then pick the matching fund.
The fees of target-date funds might be higher than for a stock fund.
Blended-fund investments:These funds have a set ratio of stocks and bonds.
you’re able to pick one thats appropriate for your situation.
This means youll have to consider your tolerance for risk and how many years you have until retirement.
Check outour complete guide to set-and-forget investingfor an idea of which funds to start investing in.
How much should I invest?
When deciding how much to invest, youll obviously have to think about your budget and your income.
You decide to save 10% of your salary in your 401(k).
Thats $5,000 that YOU contribute out of your pocket to your 401(k).
Now here comes your employers contribution.
It matches your contribution dollar for dollar up to 5% of your salary.
That means your employer will contribute $2,500 to your account.
Thats $2,500 of FREE money and a 50% return on your initial investment of $5,000.
The more you’re able to take advantage of this, the better.
But at least consider contributing the minimum amount thats required to make you eligible to receive a match.
If youre over 50, the limit is $26,000.
But if you have an employer match, you’re able to save more than your individual limit.
The maximum combined contributionthe amount you save with your employers matchis $57,000.
For those over 50, that amount of is $63,500.
If you dont think you have enough money to invest, thats another story.
Sometimes, a money market fund is the default option, which means little-to-no growth.
once you open your account.
Maybe you were too risky or not risky enough when you first picked your funds.
Maybe youve gotten older, and its time to invest more of your money in less risky options.
confirm you request a direct rollover to avoid being hit with taxes and penalties.
To keep a diversified portfolio, considerlow-cost stock fundsinstead.
it’s possible for you to withdraw the money before your retirement, but it comes at a price.
Youll also have to pay interest and fees.
Most plans charge a one-time fee of $75, and interest of at least 1%.
You are, however, paying the interest back to yourself.
Another drawback to borrowing from your 401(k): you might double tax yourself.
Fees
Its important to consider the fees associated with your 401(k) investment options.
Agood rule of thumbis to confirm your expense ratios are under 1%.
Starting your 401(k) can seem like a complex process.
But once you understand the basics, and know what to look out for, its not so intimidating.
This post was originally published in 2014 and was updated on 4/21/2020 by Lisa Rowan.
