I’m 23, in my first real honest-to-Og job. I know I should start a 401k, and that I’m young enough that I can go reasonably risky with it.
But they sent me this pamphlet of funds to pick from, and after elimating the zero risk and the super risky ones (I am a wuss.) There are quite a few left and my eyes are crossing.
What should I be looking for? (I promise I will hold none of you responsible for how this goes, I just want a bit of education.)
Thanks!
AHH! the above is me. Really. Someone just didn’t log off after he used my laptop.
If there are a few left over invest a bit in each one. Stay away from the “safe” ones for now. You have plenty of time before retirement and can tolerate a lot of risk. You can always dial back into bonds as you get older.
Put in as much as you can. I’m 37 and I’m putting in 10%. Every year when I get my raise I bump it up another percentage.
Spread your contributions around. Don’t forget the international stocks. Does your employer match?
And never never never never touch it before retirement. No matter what anyone tells you, that you can use it as a down payment on a house or for tuition. It’s not your money until you retire. Hands off.
You should be scaling your risk by how old you are and when you want to retire. Some investment places have funds called, say, “2050” or whatever, that you pick by your retirement year and they start out with a higher level of risk but risk less as you get closer to retirement. The Automatic Millionaire is one book I read recently that does a good job of laying out your options for lifetime investment.
And of course make sure you’re maxing out what your company matches. Free money, you know.
What I’ve heard is that you want to mix it up between growth and value funds, and then mix those up between large, mid and small-cap funds. Have another fraction you put into an international fund, say 15%.
Alternatively, it wouldn’t be a terrible thing to put a bunch of it into a simple index fund, along the lines of the Vanguard S&P 500 index fund (VFINX), as index funds often outperform most mutual funds over the long haul. Split the rest between international and some growth/value funds.
I’m far far from an expert, though, so take this all with a grain of salt.
Most mutual fund companies will have asset allocation tools on their Web sites that you can use to get an idea of a good mix for your goals and risk tolerance. You don’t have to use their funds, just find similar funds that are offered by your 401k provider.
Out of all the ones I’ve personally picked for myself and my wife, the balanced fund seems to be outperforming the higher risk ones.
I think the important thing is that you’re already doing it. Good move either way. Good luck too.
If I were to recommend a book it would be The wealthy barber
I’ve got budgeted about 20% of my paycheck, before taxes, so I think that’ll do. I was planning on mixing it up, and probably running a tad lower risk than I need to, simply because I’m a wuss. (What other type of 23 year old worries about precisely how they should allocate their 401k? I mean really.) I like the idea of international stuff, as I have more confidence in some other country’s economies right this second.
I don’t know if my employer matches. That would be cool.
There is a Destination Retirement 2045 plan, but I don’t know if I should do that one or pick a few of the others to make my own mix. (Ideally, I’d like to know enough to pick my own combination.) I’ll probably end up starting in one and making sure I can move things as I learn more.
Just MHO, but if the funds you’re still considering include one with “dividend,” “income” or “high-yield” in its title, make that your first purchase, as it will be focusing on investments that provide a good return in the form of dividends. You’re putting your money at risk when you invest, so I’d argue that the best place to start will be an investment that gives you a tangible return in the form of a cash payment. I can’t prove it, but I’m convinced that the high-yield strategy offers the best chance of leaving most other investors in the dust in the long run, and to quote an old market adage, profits can be faked but dividends can’t.
One thing that’s important is to also keep enough cash at hand, and some in short-term investments (like CDs). Whatever you send into your 401k should be money that you absolutely count on not needing except in case of enormous catastrophe.
If things get real eye-crossing, look for an accountant to give you a hand. They shouldn’t decide for you, but they can do the numbers: I once was offered a company-sponsored plan that was armed robbery (if I saved the maximum they allowed, the managers would be taking away over 11% or each installment in comissions). So doing the numbers can be really important to help you decide how much to put in the 401k and how much in other kinds of savings/investments.
You may have the option to combine several funds from the same managers; personally I like doing that, and I choose funds with different managers. That way if one of them has a lousy year, it doesn’t hurt my whole “nest”.
Assuming 401Ks are the U.S. equivalent of Canadian RRSPs, my advice to young people is to not put all your eggs in the 401K basket. A long-term financial strategy should be more complex than that. Call me paranoid, but anything the banks like looks suspicious to me, and banks LOVE 401Ks/RRSPs.
If I were 23 again and had it to do all over, I would first and foremost avoid all debt, I would buy property early and get equity instead of paying rent, and I would invest a portion of my income in 401Ks/RRSPs as well as other, non-gov’t regulated things.
One more thing that people tend to overlook - 401Ks/RRSPs are TAX DEFERRED, not TAX FREE. You pay income tax on them when you cash them, at whatever rate the gov’t has decided works for THEM at the time. Imagine a scenario 45 years from now, the gov’t pension plans completely broke, and they decide to tax 401K/RRSP withdrawals at, oh, say 80%.
A few things to remember.
Your company will be matching some of your contributions. Some places will match up to 3% or 5% (of your pay). Put in at least the ammount to get your complete company matching. That is really free money and don’t be left out.
However,
If your company matchs up to 4% and that is how much you put in then your company stocks, (that is what you are getting) will be 50% of your investments. So every six months or so go into the 401K and reallocate your funds.
Now for your choices.
Let’s say you have ten funds to choose from and you’ve taken out the two most risky and two least risky. That leaves you with six funds. You will be asked to allocate your contributions so you could just pick 5 of them and give each of those 5 20% of your contributions. Then watch them. Not like a hawk. Treat it kind of like a Ronco Rotisserie Oven. Set it and forget it. Remember your 401K is for the long haul. And BTW, it is great that you are 23 and starting now. Check in on your 401K every 6 months or so and reallocate your funds. Suscribe to something like the Motley Fool or start reading the Wall Street Journel. (really it’s not so bad)
Do some companies match with their stock? All the ones I’ve worked at matched whatever options you chose, in the percentage you allocated.
But it does bring up a good point. Don’t invest your 401K in your company stock. My company doesn’t even allow it. I did half mine in AT&T stock when I worked there, and was very lucky that it outperformed a general market fund when I left. I moved it all into something else. I know people from IBM who got hurt badly when they got laid off when the stock was low. And then there’s Enron. Loyalty is good, but if your company is doing well you’ll benefit in other ways. You don’t want to get hurt twice if it tanks.
Am I the only one who read the title of the op and tacked on “early in the morning?”
IANAFinancial Consultant but…
I started my current job when I was 20. I started my 401k at 21. Now at 27 I have 23k in there (give or take a few thousand.) First of all at your and my age you generally want higher risk because higher risk usually means higher chance of reward and we have time to rebuild any losses before our retirement. Someone closer to retirement would want a more conservative portfolio because they don’t have the time to make up for significant losses. At first put in whatever amount your company will match. Once you get used to not having that 20, 30, 40 bucks each paycheck, then you can increase it later if you would like. Once you have a decent amount of money in the account then you can worry about diversifying your portfolio (AKA “Don’t put all your eggs in one basket” spreading your money out over a number of funds, instead of lumped into one big fund.) Stocks are the most risky, mutual funds are next based upon how it is structured (IE percentage of stocks, bond & short term), followed by bonds, then cash reserves. I currently have about 85% of my money in stocks, 10% in bonds and 5% on short term investments (mutual funds are included in this breakdown.) That is a good starting point, if you would like to ask me anything my email is in the profile.
A 401k isn’t actually an investment. 401k is merely the section of the tax code that allows you to set aside a certain percentage of pre-tax income in various investment vehicles and not have it taxed until you take it out. You can’t actually invest in a 401k.
As near as I can tell, you’re thinking of an IRA.
Yes, a 401k is basically a number of funds (types of mixed investments) run by a bank or financial services company like Vanguard or Fidelity.
Statements like:
don’t really make any sense. Should you invest in something the banks DON’T like? Why do the banks like them? Simply stuffing money into a matress because you don’t trust banks just seems foolhearty.
Also bear in mind that most young people are very transitory and don’t have enough for a down payment on a house. That said, if you know you are going to be in one place for 5+ years, it might make sense to buy a house. Less time than that and you’ll get hit by transaction charges and capital gains taxes.
Just my two cents regarding mutual funds:
When deciding on what mutual funds to invest in keep this in mind. Out of the literally thousands of mutual funds there are out there, only about 10% of them perform better than basic index funds (i.e S&P 500 index fund, Nasdaq 100, etc.)
Unless you are willing to do all the research necessary to figure out which funds are performing in the top 10 percent, and how they may perform in the future, a safe bet is to actually use the index funds.
Even if you find a fund that appears to be consistantly in the top 10%, you can’t just leave it there and expect it to be a consistant performer. They must be monitored. Mutual funds have account managers that decide exactly which stocks will go into a particular fund. These account managers can come and go while these funds stay active. Joe investor has no idea when Mr. Mutual Fund Shark who created High Yield Agressive Growth Fund that has done great for the past 5 years, ups and leaves and is replaced by Mr. Green Rookie account manager to make decisions.
You can get funds that are great but you need to make it your hobby to constantly monitor them through Morning Star and the Wall Street Journal.
If you don’t have the time, Index funds are a safe way to go.
Do people in the U.S. refer to their IRAs as 401Ks? Cause I’m kinda confused - I looked up 401K, IRA and RRSP (Registered Retirement Savings Plans), and it sounds like the RRSP is more like the 401K than the IRA. Like I said in the third paragraph of my earlier post, RRSPs are deferred income, not really an investment (although that is how they are commonly referred to).
I haven’t heard any US people calling their 401K and IRA or vice versa. They aren’t the same thing - a 401K is only available through an employer. They have many of the same benefits but they are not 100% identical, and each has its own rules regarding deposits, withdrawals, etc.
As someone said, a 401K is not an investment in itself. “401(k)” just the section of the Internal Revenue Code that allows you to take money from your salary and put it pre-tax into an employer-sponsored retirement savings account. People call it (for shorthand) “I have $10,000 in my 401K” but what they really mean is, “I have $10,000 invested in a variety of mutual funds, which are the funds that my company has chosen for us to deposit pre-tax monies in in compliance with Section 401(k) of the Internal Revenue Code.”