I have never contributed to a 401 K before - but that option exists where I work now. From what I know, 401K’s can be pretty good or they can be so poorly managed that you stand a chance of losing whatever you put in. What are some basic things I should look for in making an evaluation of whether or not to contribute and how much to contribute?
IMHO, you certainly should contribute at the very least to get whatever employer matching is offered. If, for example, they match 100% up to three percent, then the first three percent you contribute makes the equivalent of a guaranteed 100% return. Second, depending on your tax situation, additional contributions might make sense. Or you might be better off contributing to a IRA. It depends on your specific finances. But you should be contributing to some form of tax-deferred retirement account. (Edited to add, or perhaps make post-tax contributions to a Roth IRA.)
BTW, I reported the thread for move to IMHO.
Does your employer match your contributions? If so, you should almost certainly contribute up the amount they match. That’s free money, which is like investing your money and having it immediately increase 100%.
EDITED TO ADD: Um, yeah, like Dewey said moments ago.
One big thing is the company match, if any. If the company matches any portion you should contribute enough to get the maximum match. Then, as far as investment vehicles, look for a low fee index fund. Index fund fees should not exceed 0.5%. You don’t want an actively managed fund, those are almost always sucker bets. The split between bonds, equities, and cash should be based on your age and risk tolerance. Jonathan Chance is in the business and will probably wander along with much better advice than I’ve given you.
Yes…definitely. It’s removed pre-taxed so in many cases your actual take home pay won’t be that different. If your employer matches, at a minimum you should put in the max they match. IMHO, you should put in a minimum of 10% and make that your baseline…I do 15% personally, and I don’t even notice it anymore. Except when I get my statements of saying how much it’s grown in the previous year.
Also, never touch the money. Don’t borrow from it, don’t take out early…just leave it alone unless, literally, it’s life and death. Just leave the money alone and let it grow. Don’t freak out if there is an economic downturn and start yanking the money out. In 2008 I lost around $100k from my primary account (and probably about that much again from my secondary ones). By 2010 I was back to even, and today I’m way ahead because I simply left the money alone and looked at the long term. I know folks who panicked and today are way behind because of it.
Given there will be many opinions offered, moving this to IMHO from GQ.
samclem, moderator
A 401k can be a great way to sock money away from retirement. Unless you work for the government, you shouldn’t count on any employer benefits in retirement. Even if a corporation promises them now, they can take them away later.
One good thing about a 401k is that the money isn’t always counted towards your net worth when applying for certain types of financial aid (like college). If you had your retirement money in a normal account, it could affect how much aid you (or your kids) would receive.
Since you’re asking this question, I’m going to infer that you’re not too knowledgeable about investing, in which case you should be putting the maximum amount into your 401k. How else are you, Mr. Nylok, personally going to be able to have the hundreds of thousands of dollars necessary in retirement? People who are good at investing may be able to do better by having their money in a normal account, but for most people who don’t have the time or inclination to invest, a 401k in a safe, boring fund will work out better.
ETA: You can (usually) change the contribution percentage at any time. If you are contributing the maximum and then your financial situation changes where you need more available cash, you can reduce or eliminate your contribution at that time to increase your take home pay.
Yes. Not having done so in my first job is one of my regrets.
Company put in about $2000 (about 4% of my pay while I was there) which is now worth $69K.
If there is company match, then not contributing up to the company match limit is essentially throwing away money (albeit money that won’t be particularly useful for decades, depending on your age).
Well, I’m glad I asked. I am thoroughly convinced of what I should do.
Invoke my name and I appear. Yes, I’m in the business. I manage both individual money - when requested - and many 401k and other retirement plans.
I can’t give advice directly on a message board. I’d get fired. But here’s some
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Discover how much they match. Do that. If it’s a fractional match you can do some math to figure out what you need to contribute. There’s simply no way to match a 100% or 50% first year return.
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Choose your funds carefully. As I posted in another thread yesterday the advice about index funds is very catholic but ultimately fallacious. It’s relatively easy to beat index funds with the right approach, whether with mutual funds or with individual equities.
If you want help with your fund selection drop me a PM. I’ll be glad to help…just not here in a public forum.
The number you want to focus on first is the match - like everyone says you really must contribute enough to get the full match unless you have a VERY good reason not to.
Then look at the expense ratios of the domestic funds. Focus on the lowest ER first, and see if there is a mix that fits your needs. There is a bit of thought that goes in to this (risk tolerance, age, year to retirement, etc). A dedicated financial advice forum may be a better source for information - my go-to source is http://www.bogleheads.org (it has a bias towards index funds, specifically ones from Vanguard, which fits my biases as well - YMMV). If you post your fund choices there you will get a lot of good feedback, IME.
I would quibble with the notion that it is “relatively easy” to beat index funds, but this is probably not the time or the place (and Mr Chance’s employer’s limitations would probably circumscribe the discourse anyway).
I’m confused, did you contribute or not?
Some companies make minimum contributions as a part of benefits packages, and then additional contributions to match what the employee puts in, up to some cap.
While I have known of a couple people who were thoroughly screwed by a badly mis-managed 401(k) such instances are very rare. All other things being equal, you’re better off contributing than not.
MUCH more often people are screwed by their own choices or lack of understanding.
That said, if our investment professional could, perhaps,* in very general terms*, tell us what warning signs there might be that an investment fund of any sort is a bad risk or mis-managed that might be both useful and reassuring.
If you choose NOT to contribute to a company 401(k) you most certainly should contribute to some sort of retirement fund. When I was at the company with the badly-mismanaged fund I did not participate but I did set up my own, separate, investment fund. I didn’t do as well as if I had put into a good 401(k), but it was certainly better than nothing. In that particular instance I came out ahead of my co-workers, but it was a fluke circumstance.
I’m intending to sign up for my current employer’s 401(k) next quarter when I am eligible to do so.
Agree completely with No. 1, as everyone else has pointed out. You get an immediate huge return and save on your current taxes, as well. As for No. 2, I’d add that it’s also very easy to NOT beat index funds, especially in the long run. Index funds are a tool, and a pretty good one, at that, if you choose ones with low expense ratios. But whether you choose index funds or actively managed ones, pay attention to expense ratios and choose funds with low expenses.
And putting enough in to get your company’s match is the MINIMUM you should put in. Put in more than that if you can afford it at all.
Put the money in your 401k and don’t take it out. Not to buy a car, or to buy a house. Or when the market corrects, and certainly not when it crashes.
As for #2, when I had to move my 401k out of the company plan, I researched a couple of different options with several financial advisors/brokerages.
I found that fund fees and management fees together ran 1.5-2.0%. Since I plan on following the 4% or less withdrawal scheme, it seemed unwise to pay half of that to others. By going with a 3-fund index plan I expect to minimize investing expenses (under 0.5%) and still maintain good long term returns.
For me, studies of long term managed fund performance and the BogleHead wiki convinced to to abandon managed funds and commissioned advisors.
Could you explain this thought a bit more? The only “losing everything” risk in my mind would be if they made you put it all in company stock, which would be a deal-breaker depending on the holding period and if there were any price discounts, though I’m pretty sure the practice has gone out of fashion due to Enron.
I would expect all 401ks to have some sort of market index fund that is hard to go wrong with. Poor management usually means performing a 50-200 basis points below benchmark, which is a far cry from losing everything.
It’s easy to win the lottery, too.
I’ve been contributing since 401Ks started, am now near retirement, and am a very happy camper.
One thing not mentioned - if there is an option to invest in your company’s stock - don’t take it. Your salary and job depend on the health of your company already, and the last thing you need is to get laid off close to retirement when the stock dives and have nothing. I know someone who worked at IBM and invested in IBM stock and got really hurt. And the Enron people got really screwed.