If you plan on retiring at some point in your life, you need to read this. Retirement is not something we often think about in our 20s and 30s, but planning for the future is important. Do you imagine yourself on the Florida coast sipping margaritas when you’re old and grey? Then you need to be setting aside money now.
You may have not thought about setting up a 401(k) account yet. Maybe you don’t fully understand what it even is or how to get started. But if you follow the quick guide below, you’ll be setting yours up in no time!
*Disclaimer: I am not a finance professional. These are just the methods that I use to track my personal expenses.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement account that you can optionally enroll in once you reach a certain milestone in your employment. Depending on your employer, you may qualify for enrollment immediately upon hire, or it could be after 90 days, 6 months, or 1 year of employment. If you work for a medium to large size company, then they likely offer a 401(k) program.
Step 1 – Determine your eligibility and sign up
Reach out to your HR department and ask for information on signing up for the company 401(k) program. If you were not aware when you were hired, be sure to ask when you will be eligible to enroll in this benefit. After reviewing the information they provide, you will need to go online and signup through the 3rd party providing the 401(k) fund options (Fidelity, Vanguard, etc.). For now, just create a login and password.
Step 2 – Establish your contribution amount
You will want to take a couple of things into account when determining how much to contribute to your 401(k):
- Using my Personal Budget guide, establish how much money you can afford to contribute to your 401(k) plan.
- Refer back to the documentation provided by your HR department to see if your employer offers a 401(k) match program. Most employers offer a 4-5% match, meaning they will match your contributions up to the specified amount. It would be wise to contribute the match amount out of every paycheck to fully maximize your funds.
Once you’ve identified the percentage that you want to contribute out of every paycheck, you will need to enter that in on the 3rd party site.
Step 3 – What type of 401(k) account do you want?
Traditional 401(k) account contributions are taken from your paycheck pre-tax. Some companies offer a Roth 401(k) which is taken out of your paycheck every month AFTER taxes are paid. I have a traditional 401(k) and then also utilize the Roth 401(k) outside of my company’s fund.
Step 4 – What accounts do you invest in?
Now you’ll need to select the accounts you want to invest in!
I’m not a financial advisor, but I will share with you what I did for this step. I put my money in the company index fund options instead of the costly mutual funds. Index funds are LOW cost funds that have extremely low fees, and turnover costs, meaning you are not paying an account manager a ton of money and you are not paying fees due to the account manager buying and selling a ton of stocks. (To learn more about index funds, read about how to invest your money to make money.) I split our index fund investments in our accounts: 10% company stock, 15% international index fund, 25% small cap index funds, and 50% in an index fund closely following the S&P 500. It’s important to protect yourself and move your company stock in to one of the other funds when it gets above 10% of your portfolio.
Pro tip: Set a reminder in your calendar or phone for every 6 months to check on your portfolio and make adjustments as needed.
I know it’s not exciting to think about now, but having a plan for your future will get you one step closer to that beachfront retirement home. Feel free to leave a comment if you have any questions!