Understanding your 401k is essential to setting yourself up well for your retirement. The problem is that most people don’t know how to do it, let alone how to get the most out of it. If that is you, don’t stress. If your desire is to learn the proper way to start investing in your 401k, You’ve come to the right place!
How to Get Started Investing in Your Employer’s 401k
Before moving forward, let’s chat about what a 401k is. If you have just started work or are thinking about retirement you have probably come across the term ‘401k.’ It is a retirement plan that is sponsored by your employer.
The amount invested will automatically be taken out of your salary every month. This way you are investing and saving without really doing much. (You probably had to fill out some forms dealing with your 401k when you started at your company.)
You would have the option to invest in different assets like stocks, bonds, and mutual funds. Your invested money grows until you retire, and then you have a nice amount to cash out and enjoy your golden years with.
Related Video: How to Invest In Stocks For Beginners
Why You Should Begin Investing in a 401k
Investing in a 401k is important because it sets you up nicely for retirement without much effort from you. Many people choose to not invest in a 401k, or they contribute as little as possible, because they rather have the extra money to spend now instead of saving for later.
Future you will need that money way more than present you. It is a small sacrifice to be set up to live comfortably when you retire. You also get tax breaks, and in some cases, your boss might give you a bonus and match your contribution. This is all free money that is just being thrown your way.
Allocating Your Investments Correctly
When you have a 401k, you get to choose how you want to distribute your investments. The younger you start investing in your 401k, the riskier you can be, because you have a longer time to recover should something go wrong. Investing is a sort of high risk/high reward scenario. If you can invest in high risk and still be safe, then you should do it.
At this point, you would be investing your money into stocks and bonds. Stocks are more high risk because they are volatile, but they also bring the most amount of returns. Bonds are more stable, but not as lucrative.
If you are in your 20s and 30s you can use a 80/20 split for your investment portfolio. This means 80% goes to stocks and 20% to bonds. It gives you some security, but you have funneled most of your investment money into what will give you the highest return.
If you are still confused about where and how to invest your money you can get a financial advisor on board.
Getting the Most Out of Your 401k
If you are ready to get your 401k started, or you already have one and are looking to maximize what you can get out, then this is for you! Apply these tips and you will be able to get the most out of your 401k.
Max Out Your Employer Contributions
With regards to a 401k, many employers offer contribution matching, which just means that they will match the amount you contribute up to a certain amount. So, for example, if you contribute 4% of your salary, they would invest that same amount as well. Every company will have a different maximum contribution, so find out what yours is.
Don’t just go for the lowest possible contribution. Push it to the maximum matching contribution; this will allow you to get the most money you can into your retirement savings. It’s like your employer is giving you free money, so why not take advantage of it.
Related Podcast: The Definitive Guide To Help You Understand 401k’s & IRA’s
Diversify Your Investing Portfolio
A portfolio is just a word that is used to describe all your investments. If you have investments, then you have an investment portfolio. You’ll want to carefully diversify the investments in your portfolio as much as possible.
If you have four stocks, three bonds, and three mutual funds that you invest into, your portfolio is diversified. You have different places that your money is going onto. This means that if one crashes, you still have many other investments that remain stable, and you won’t lose all your money.
Continuously Increase Your Investment Amount
Chances are you will not be staying at the same salary throughout your career. You will get raises and promotions which will increase your salary, and as your salary increases, so should the amount you save and invest.
One of the biggest mistakes that people make is to keep increasing their standard of living without increasing their savings. If we were all completely honest with ourselves, we would admit that we don’t have to increase our standard of living based on our salary. It is unnecessary.
Now I’m not saying that you should not enjoy the money that you earn. However, saving for retirement is more important than buying a new car when the one you have is perfectly fine.
Every time you get an increase in salary, increase your contributions to your 401k. Future you will thank you.
Avoid Early Withdrawals
Life can sometimes hit you with an unexpected emergency and it can be tempting to reach into your 401k for a little financial boost. As tempting as it may be, I highly advise against it.
It might seem pretty straightforward to take the money out of your 401k, but it is not so. If you take out money before you are 59 ½, you will have to pay a penalty. If you take the money out on a loan, then there is no penalty. but there is a whole host of catches that come along with it.
When you pay back the loan, you will have to pay it back with interest, and if you do not pay it back within a stipulated time frame, you will be penalized. It will also take you longer to build back up to the amount you had prior to taking your money out because you will have to pay back the loan with after-tax money.
It is far better to just leave your 401k alone, if at all possible. You should have a separate emergency fund that you can dip into in a pinch. This can be placed into a bank account that will earn you some interest.
Related Article: How Much Money You Should Have In Your Emergency Fund Savings
Final Words
A 401k is essential to being able to retire comfortably. If you have a company that offers you a great package then take advantage of it! Try and invest as much as you can so that you don’t lose out in the end.
