What exactly is a 401(k) plan? Simply put, it’s a way to save money for retirement through your job. You set aside a set amount of money from each paycheck that is placed into an account. From this account, you can invest the money in things like stocks, bonds, or mutual funds.
The eventual goal is to have that invested money grow into a huge pile of cash by the time you retire. To help, the government has been kind enough not to even tax it until you withdraw it. Why should I get one, you ask?
Look, saving money is about as exciting as waiting for grass to grow, but it’s one of those necessary evils in life. When you retire, it may be the only source of income you have, especially is Social Security disappears as expected.
How Do I Decide Where To Invest The Money?
This is very much up to you. Are you a little on the lazy side? Try target-date funds. All you have to do is set the date you intend to retire and it basically does the rest. These tend to have a little bit higher fees, but the lack of work involved to keep up with them balances out the price.
Do you need to save a little quicker? Try investing in stock funds. Most 401(k) plans don’t offer very many. This means choosing one won’t be very difficult. It is suggested that you find ones with low fees and high long-term returns.
If you are not the type to handle risk well, you can always invest in bonds/managed income. Your money will be safe, but it will not grow very much at all. You can also consider investing in real estate for minimum losses and to benefit from the consistent increase in property value. If you have plans of settling down in a senior community similar to The Chelsea Senior Living (check out chelseaseniorliving.com/locations/new-jersey/manalapan/ for more information) after retirement, you can purchase such properties as assets. Understanding investment risks and your retirement goals can be essential to plan for the future, which means 401(k) might or might not work for you.
How Much Do I Invest?
You will have to start by saving money every month before you collect a considerable amount that could be invested in some assets. When considering how much to put back each month, the first thing you have to consider, obviously, is how much you make and what your yearly expenditures total up to. After that, look into whether or not your employer offers 401(k) fund matching.
There are several that will match your contribution dollar for dollar up to a certain amount. For example, say you make $60,000 a year and you agree to put pack 10% of that a month into your 401(k) plan. Your employer agrees to match your contribution dollar for dollar up to 7%.
That means at the end of the year, you will have dedicated $6,000 to your 401(k) and your employer would have donated $4,200. This would give you a total of $10,200 saved for the year. However, be careful. There is a limit to what you are allowed to save in a 401(k) plan per year. If you are 49 and under, the limit is $18,000 a year.
Some Common Mistakes
As with anytime we venture to try something new, there are a few common mistakes most people tend to make. The first one is not taking advantage of the employer matching program. The $4,200 mentioned earlier is free money!
Who in their right mind wouldn’t accept free money? The second mistake a lot of green investors make is just not keeping up with their investments. Things change over time. As you get older, you may be able to invest more. You may find that you were a little too risky in the beginning or maybe not risky enough.
Check in from time to time and balance things out. The last, and probably the worst, mistake some people make is not transferring their 401(k) plan when they switch jobs. Yes, people actually leave behind thousands of dollars simply because they forgot. Don’t be one of them.
Having a 401(k) plan is vital to your retirement. Use these tips to help you achieve that pillowed landing into your golden years.