Your first day of work is combined with meeting new people, getting your employee ID, and learning your way around. But don’t forget your new employee benefits packet, as you will find the details on your 401(k) plan. On this day you are responsible for your own investment, and your 401(k) plan is a big part of it. Learn how you can save as much as possible to ensure a comfortable retirement.
How 401(k) Plans Work
401(k) plans offer employees to save for retirement with a tax-advantaged account. The employee and the employer, both will contribute to the account every pay period. Combined, 401(k) contributions means you do not pay any income taxes when you earn the money. Your dollars will presumably be lower in retirement as you won’t have a full-time income.
Review Your Benefits Packet
At large, your benefits packet is loaded with health insurance, life insurance and company retirement plans. Very few employers offer pension plans, but most employers offer a 401(k), that makes this type of savings plan possible. You will find how your employer match works, and which investments you can choose.
Take Full Advantage of the Company Match
The first place to look is your employer match, which is typically 3 to 6% of your salary. Generally, employers match 50 or 100% of your contribution up to the salary limit. To take full advantage of the employer match; the employee must contribute 6% of their salary. That is like contributing 9% to their 401(k), which is not enough to maintain the same standard of living in retirement.
Choose Low Cost Investments
Now 401(k) plans typically offer a list of investment options for employees to choose from. You can choose from your employer that offers 401(k) management as an additional service. Your 401(k) mutual funds allow you to buy a group of stocks rather than investing in individual stocks. This gives you some popular types of funds that you may have the option to choose from.
- Broad market fund – Funds that include all stocks in an index like the S&P 500, or other major groups of stocks. In fact, Warren Buffett, suggests the average investor put 90% of their investments into a low-cost S&P 500 index fund. And 10% in a short-term government bond fund that is not a bad plan to follow. If your 401(k) allows it could lead to the best investment return plan in retirement savings.
- Domestic Stocks – Many mutual funds are focused on the stock market, like large companies, small companies, or a mix. These are US based and considered more predictable and safe than foreign stocks.
- International Stocks – International stocks fall under the same categories as domestic, but with a few more options. Funds like an international growth fund may be more risky investment options.
- Bond funds – Bond funds invest in the US government, municipal, and corporate bonds. Bonds are a form of debt paid back over time, generally safer investments, but offer a lower return.
Setup Automatic Increases
The 401(k) providers give you the ability to automatically increase your percentage contribution. Second, automatic increases help you earn more, so get into a habit of putting it away for retirement. It will guarantee it goes to your future rather than a frivolous purchase today. If you automatically increase your 401(k) savings, your future self will thank you.
