401(k) - Take Advantage of Your Employers 401k Plan
Apr 14 '00
If you are a recent college graduate; I'd highly recommend that you take advantage of your employers 401(k) program. Forget buying that nice new BMW Z3, Porsche Boxer or that Ferrari F355 . . . for now, at least. You have plenty of time to earn enough money to buy these toys in several years.
Here's what I did right out of college. I didn't exactly land that $80,000 a year position. But when my employer offered me a 401k plan, I jumped on it with full gusto. I immediately put the maximum amount I could which is 12% of my pretax salary. My employer also kicks in .50 for every dollar I invest so it is like free money! Additionally, my employer provides us with profit-sharing at years end.
OK, so where did I sock my monies away in? I chose very aggressive stocks/bonds that carried a risk but the long term outlook was well worth the volatile market swings. I put 90% into aggressive which invested in the top 100 US companies. Ten percent went into an International Fund which comprised of major companies throughout the world. The latter fund is somewhat risky but I wanted to test the market.
How much should I contribute? If you are in the age bracket of 21-28, I'd recommend you start off low at, say, 6%. Work your way up slowly by 1% periodically. Believe it or not, the small increases will not mean too much in terms of your paycheck. Go for the maximum amount allowed by your plan. It may be hard to justify this at a young age but you have to think about your retirement.
Should I go aggressive, moderate or guaranteed? Here's what I have learned. In your younger years go aggressive. As you hit 45, reverse the trend and invest in more moderate risky stocks/bonds. Then as you approach your retirement; shift towards the safest (guaranteed - very low risk).
Example: If you are 21; subtract 100 from 21 - you get 79. Typically, you would want to invest 79% into aggressive stocks/bonds for the long term (Don't think short term) and 21% in moderate to low risk funds. As you get older; your choices will slowly revert from aggressive to less risky.
At age 45; 55% should be in moderate to medium risk funds and 45% in less risky funds.
At age 55; 45% should be in moderate to medium risk funds and 55% in less risky funds.
Your risk factor Are you easily scared of the ups and downs of the stock market? Do you have a high debt load (college tuition)? Are you unwilling to sacrifice today for retirement? If you answered YES to these questions; then start off investing in moderate risk funds.
Should I even think about borrowing against my 401k account Hold it! STOP! Don't even think about touching that money! You are taking this money out when it could potentially earn tremendously more for you! Besides, Uncle Sam will penalize you for an early withdrawal. Some 401k account plans allow you to borrow against your account or use a percentage to buy your first home. Even then, Don't even think about ever borowing against your 401k account.
Caution If your 401k account is accessible via the Internet such as Vanguard, Morgan Stanley/Dean Witter; don't be discouraged when the stock market drops and you see a huge chunk of your account eaten away. Remember this is short term. You are in it for the long haul right? So, sit back and relax! Remember Statistics or Algebra class in college? Compounded interest accumulates really fast and especially so as your account grows in size.
Many of you may think I am crazy for investing very aggressively. Yes, I did put 100% into the most aggressive funds I could find because I saw the long-term potential of these funds. I was young and could afford lose it and start over -- retirement was at least 45 years away! That's a long time. Today, 15 years later, my 401k account is in the six-digit figures and I am still saving aggressively. I'm going to invest aggressively until I am 55 as well.
U.S. Social Security Don't be fooled folks. If you are in the latter part of the Baby Boomers or are the kids of Baby Boomers; do you think Social Security will be around for us? NO WAY! Our retirement age went up from 62 to 67!
So don't be foolish -- invest in your employers 401k plan TODAY!
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Member: Steve
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