This material was prepared for Lee Curry, LPL Financial Advisor, use.
As if starting your first job isn’t stressful enough, signing up for your first 401(k) can feel a little overwhelming.
While some companies automatically enroll employees in their 401(k) plan, more than likely you’ll have to fill out some paperwork to participate. You’ll have to decide how much you want to save every pay period and what funds you want to invest in. Although these may seem like daunting tasks, don’t worry. You’ll be able to make changes to your plan at any time.
We’ve put together some tips to help make the process as simple as possible.
Review the information you receive closely.
When you start a new job, you’ll likely receive some literature about the employer’s retirement program, along with instructions on how to enroll. Take your time in reviewing this information, and don’t be afraid to ask if you have questions.
Determine if your employer will match contributions.
If you didn’t talk to your new employer about whether they match contributions during the hiring process, now is the time. If your employer matches, make sure you invest at least enough in the plan to get the entire company match. Otherwise, you’d literally be throwing away money.
Let’s imagine your employer kicks in $0.50 on the dollar for up to 6 percent of your pay. That equates to 3 percent of your salary. If you earn $40,000 per year, you would get $1,200 from the company if fully vested in the plan. This example is for illustrative purposes only.
Figure out exactly how much you want to invest.
Determining exactly how much to contribute to your 401(k) is probably the most difficult step in this entire process.
The money you contribute to your 401(k) plan will come out of your paycheck before taxes. While you don’t want to contribute so much that you can’t afford your current lifestyle, you also want to make sure you have a comfortable retirement.
As outlined above, you’ll want to contribute at least as much as your company will match. Many people contribute up to that cap and then forget about it. While this number certainly provides a floor, most of us will have to chip in some more to accumulate a happy nest egg.
Some financial advisors recommend saving at least 10 percent of your income towards retirement. If you consistently save 10% throughout your entire career you will likely accumulate an adequate nest egg at retirement without needing to ramp up contributions when you are older.
Remember, you can always increase (or decrease) your contributions throughout the year.
If you are unsure about elements of this process, reach out to your employer’s HR department to see if they can refer you to a 401(k) plan administrator you can talk to. If no one is available, seek out an investment professional for more advice. Be sure to ask them if they charge a fee for providing you with specific recommendations based on your risk tolerance and investment timeframe.
Lee Curry is a LPL Financial Advisor at MidWestOne Bank. He specializes in investments and retirement planning.
MidWestOne Bank and MidWestOne Investment Services are not registered broker/dealers and are not affiliated with LPL Financial.
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