So You’ve Got a 401(k) and You Don’t Know What to Do With It

Sometimes, saving for retirement is low on your list of problems to solve. Paying the rent or keeping your demanding boss happy can consume all of your energy — which doesn’t leave much brainpower to deal with that 401(k).

That’s understandable and also not uncommon. Data from the Bureau of Labor Statistics (BLS) indicate that 29% of people who have access to a 401(k) aren’t actively participating. If you’re in that group, give me five minutes and I’ll share three quick steps to get your 401(k) working for you.

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1. Find your login information

You should have paperwork or an email from your employer that explains how to log into your 401(k) account online. Find it and log in so you can set up your contributions and your investment selections.

2. Check your contributions

Your contribution is the amount taken from your paycheck and deposited into your 401(k). If you were enrolled into the plan automatically, you might already be making contributions.

First, check to see if you are making contributions and, if so, how much. You may have the option to set your contribution as a dollar amount or as a percentage of your salary. Choose the percentage option. That way, the dollar amount goes up every time your pay increases. 

Experts recommend saving 10% or 15% of your income if you can. Go lower if that feels like a stretch, but shoot for at least 5% or 6%.

That percentage will usually qualify you for employer matching contributions if they’re available. These are free deposits your employer makes to your 401(k) account, and they’re based on how much you contribute. If you have the time and motivation, look up your employer matching rules. Then you can adjust your contributions so that you’re getting 100% of that free money.

3. Choose your investments

Now check your investment selections. If you were automatically making contributions, you may be automatically investing, too. The default investment is usually what’s called a target-date fund or TDF. These are mutual funds that invest in stocks, bonds, and cash. They’re intended to be the only investment you hold in your retirement account, and they’re very low maintenance. Their defining feature is a risk profile that gradually gets more conservative over time.

You can usually identify a TDF by its name. You will probably see a group of funds with the same name but different years or “vintages.” You’d choose the year you plan to retire. That way, the fund’s risk level should be appropriate to your retirement timeline. You can double-check this by reviewing the fund’s documentation, which should explain how the fund’s holdings change over time.

TDFs have the advantage of being easy. You make one decision and then keep contributing to watch your balance grow. The downside is that a TDF may not address your individual needs very well. You can’t customize the risk or growth characteristics at all. But if you want to get your 401(k) off the ground with the least amount of effort, the TDF is a reasonable solution.

Your wealth journey has just begun

My five minutes are almost up, but I’ll leave you with this. As you see your 401(k) balance grow, you might be inspired to shift away from TDFs into a more customized portfolio. Your next step might be to move into a collection of index funds, for example. To do that effectively, look to expand your knowledge about how different types of investments (called asset classes) behave. From there, you can learn to combine the asset classes to create a retirement portfolio that matches your timeline, growth needs, and risk tolerance.

That will involve some extra brainpower and more than five minutes of study. But your efforts will be rewarded with knowledge you can use to build even more momentum in your wealth journey.

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