Do You Understand Your 401(k)?

By | March 6, 2014

“The question isn’t at what age I want to retire, it’s at what income.”

~George Foreman

Most of the people feel helpless when it comes to investing money. There is no denying that investing can be confusing at time. If you are working in a company that offers 401(k) retirement plans, you should definitely invest in it. Start investing as early as possible because every single dollar you invest today gets double or even triple returns by the age of your retirement.

Do You Understand Your 401(k)?

Do You Understand Your 401(k)?

For most of the people, 401(k) plan is the primary source of income after retirement. You can grow your retirement income considerably with proper awareness about 401(k) retirement plans. It allows you to prepare for your retirement in a better manner and with a better income source.

What is 401(k) retirement plan?

401 (k) is a company-sponsored retirement plan offered to the employees. Employees have the freedom to choose the amount of money they would like to invest every month. This amount is adjusted as per the inflation and keeps changing at regular intervals. As per the current standards (2014), you can invest up to $17,500 towards your 401(k) and an additional catch-up payment of $5,500 if you are above 50 years of age.

What are your contributions in 401(k) retirement plan?

You can contribute from your paycheck before paying any taxes, which means you are already saving the tax money. For an instance, with an effective tax rate of 25%, you are paying 75cents for every dollar invested in your 401(k). However, you have to pay taxes at the time of withdrawal. In sixty percent of the cases, it is a favorable situation because most of the elders fall in a lower tax bracket after retirement and pay comparatively lower amount into taxes. At the same time, your money has the maximum opportunities for growth along with the compounding interest. The interest earned by your contributions is tax-deferred, which means you would not pay taxes until you start receiving the money.

Top 5 tips for investing in 401(k)

Most of the companies have similar 401(k) retirement plans where employers match your contribution. Company’s investment professionals manage your savings or you can choose different stocks or mutual funds for your investment. However, if you are not aware of these details, here are some important tips to help you in the process.

Identify your retirement needs

As said by Suze Orman, “To enjoy a long, comfortable retirement, save more today.” One of the common mistakes people make is to consider that their expenses will come down during retirement years, which is highly unlikely in the practical world. You need to have an idea of your retirement life and your requirements during that period. Note down your potential income sources during retirement including Social Security payments, employer-sponsored retirement income, income from your savings, and your 401(k) investments.

Set a goal for your retirement savings

Once you have an idea of your retirement needs, set a monetary goal or account balance for your retirement. It is best to start as early as possible, so that you can enjoy longer growth period for your tax-deferred income. Starting in your 20s can increase your retirement funds considerably and you can withdraw a handsome amount in your retirement period.

It’s never too late

If you have not started investing in your 401(k) plan until now, start today itself and make the maximum contribution that you can. Make sure to setup a retirement account balance and align your investments accordingly. You can consult a financial advisor for an excellent portfolio allocation as per your target amount.

Diversification of your investments

It is best to follow a diversified investment approach. Choose an investment strategy that allows you to create a proper balance among conservative and aggressive investment options. It becomes critical if you own employer stock in your 401(k) investment plan. You should review your portfolio in a periodic manner and make changes as per your requirements. You need to rebalance your portfolio against market conditions. It ensures that you portfolio doesn’t become over-aggressive or conservative with time.

Change in Job and 401(k) retirement plan

It is always exciting to land a new job and if you are planning a change of job, it is best to rollover your 401(k) retirement plan to the new company. It will ensure that your investment will retain similar matching contributions and better results with compounding. Do not take off your 401(k) investment while changing the job because you would have to pay penalty and tax on your withdrawals.

One thought on “Do You Understand Your 401(k)?

  1. MoneyAhoy

    I think anyone that doesn’t take full advantage of the employer match is insane! While it’s never too late to get started, young folks should get serious about saving because of the powerful effects of compounding interest!


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