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5 Considerations for Getting the Most Out of Your 401(k)

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Congratulations! You made it through several rounds of interviews and landed a sweet new job. Your first day is full of the usual jitters: planning the right outfit, showing up on time, and avoiding getting lost. You have been walked around the office and introduced to people whose names you can’t remember. You have filled out your name, address, and social security info on your W-4, I-9, and insurance forms, all before seeing your new cubicle. Finally you’re presented with a glossy pamphlet detailing your financial future — your 401(k) plan paperwork. Ugh.

Look, I’ll admit it — I’ve worked in finance for years, and sometimes even my eyes glaze over when it’s time to make personal financial decisions, but understanding how your 401(k) plan works is important both for short-term tax savings and long-term financial stability. Here are five tips to making the most of your plan and tackling the mounds of paperwork.

Employer Match

Unfortunately, employer matching has become less of a given since since the Great Recession. However, if your employer offers this benefit, it is one of the most compelling reasons to participate in the plan. If your employer does matching, they will make a dollar-for-dollar deposit to your account based on what you give, or will sometimes have a phaseout. For example, a 100 percent match for the first three percent of your salary you contribute to the plan, followed by a 50 percent match for the next three percent. This is perhaps the only “guaranteed” investment return you will ever see. Not participating in the plan means leaving free money on the table.

Employer Contribution

This is similar to an employer match, but better and more rare. An employer contribution is the amount an employer contributes to your 401(k) regardless of what and whether or not you contribute. In pre-recession days, my previous employer contributed 8.5 percent of an employee’s salary to 401(k) plans. However, contribution should not be looked at as an incentive not to add your own savings. Your company is making an investment in your future, and you should certainly make a similar investment in yourself!

Your Contribution

Even if your company doesn’t offer a match or contribution, you should still contribute to your 401(k). Why? Tax savings! Your 401(k) contribution is made pre-tax, which means your taxable income is reduced. To break this down further: Assume you make $50,000 a year and contribute 10 percent of your salary to your 401(k). You are now taxed on $45,000 per year instead of $50,000 per year. And while the $5,000 you put away isn’t in your pocket now, it is being invested in your future. As for how much you contribute, you should definitely contribute as much as you can to max out your employers’ benefits. After that, see if you can target your total contribution to 10 percent of total income when you are starting out. The maximum amount you can contribute to your plan is $16,500 a year. If you’re able to do that, fantastic! But if not (and I think a lot of us are in this boat when starting out), try to contribute 10 percent annually.

The Investments

This is the part that gets tricky and causes a lot of people to freeze up. You’ve signed up for your plan, but now how do you invest the money? In my first job, I “invested” in money markets because I was too scared to research the stock market. This investment yielded a conservative one percent return while the S&P 500 was averaging 8.75 percent annually. Is there anything wrong with being fiscally conservative? Absolutely not! But there is something wrong with being uninformed. Had I spent a few minutes talking to a trusted advisor or my plan’s administrator, I may have made the same investment decision, but it would have been an informed one. Your 401(k) plan likely comes with an option of 20 or so mutual funds to choose from. The easiest option is to choose a targeted date fund which chooses investments based on your likely retirement date. These funds will have names like XYZ Target 2040. It is worth noting that these funds may have higher fees than other funds, but you are paying for ease and peace of mind.

Another option is to construct your own portfolio, which is something I’ll delve more into in future posts, but the idea is that your conservative investments (money markets, bonds) should be in a percentage roughly equal to your age, and your riskier investments (stocks, international funds) would be the rest. Of course, there’s more to this, and I recommend talking to either your HR rep or plan administrator to get help. It can be intimidating when you’re unfamiliar with financial language, but plan administrators are paid (handsomely) by your company to be a resource to you. It is their duty to help you, so don’t feel shy about calling for advice.

Monitoring Investments

The investments in your 401(k) are there for the long haul. I wouldn’t say to ignore your plan completely, but you also shouldn’t freak out about daily (or minute) swings in the market for your plan. Review your quarterly performance to see how your funds have done against benchmarks (similar funds) and adjust annually as needed.

What is the best long-term investment you’ve made and how did you keep yourself incentivized to do so? Tell us in the comments!

Ask Levo Mentor Warren Buffett, CEO of Berkshire Hathaway Inc., his best investment practices at any point in your career!

Topics:

Investing #Retirement Finance #401k Career Advice
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Join the conversation:

Wow this is such helpful advice for someone just entering the workplace. I have never realized the power of a 401(k) and this definitely motivated me to start saving now!

I could definitely relate, my eyes glaze over whenever I think about money and my future. It's a scary thought but a harsh reality. I'm not the best at managing my money and it instills some fear that those characteristics will carry into my future. With these specific tips, I'm a little more confident that I will be able to do wonders with my finances!

So happy to see these articles coverin financial matters... Definitely something I need to think about and be aware more of so I am ready!

The most important things: start saving and never feel nervous asking questions about money - especially your own! I was super nervous starting in finance without studying it in undergrad and was at first nervous to ask questions but soon found out that people are thrilled to help and even the finance pros have the same real life concerns we do!

I will definitely be sharing this with any recently graduated friends. I am interested in financial education, so I have to say thank you for writing this; it will be helpful to a lot of people!

I'm employed by a nonprofit, so I have a 403b plan. Do you have any advice for that plan that's different than your 401k advice?

Absolutely. The mechanics of 403b's and 401k's are similar but of course, there are some important differences. Feel free to email me at carleton.english@beluscapitaladvisors.com and I'd be happy to talk you through it!

Lisa Swanson
Lisa Swanson

Isn't the 401k cap $17,500 for 2013?

Agnes Z
Agnes Z

I am so happy to hear about this! I planning to make a career switch from fine arts (which was what I studied in undegrad) to finance. So far I'm having a hard time getting my foot in the door. I also completely agree with you, when asking questions people are always so helpful!


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