Tips for a Great 401k

My local newspaper (not usually known for great financial advice) recently printed a two-page article titled Nurturing Your Nest Egg. It was full of great tips on making the most of your 401k. Over the next few days, I'll be sharing some of these with you. 

Today, I want to share their five tips for making the most of your 401k. They are:

• Start participating now. The sooner you start, the longer your money has to grow.
• Know your rights. By law, you are eligible to start contributing to a 401k plan after one year with a company, if one is offered.
• Pay yourself first. Your contributions are taken directly out of your paycheck and deposited straight into your 401k.
• Contribute the max. $14,000 in 2005; an extra $4,000 for those 50 and older. Limits increase by $1,000 next year.
• Be flexible and look long-term. Review your 401k plan quarterly and definitely annually to ensure it still meets your needs.

This is solid advice. I might have added or expanded upon a few points, but basically, it's all there. Stay tuned over the next two days and we'll add a few more pieces that will round out the information on how to best manage your 401k.

Comments

[Anonymous]

Most companies don't make you wait a year to enroll. You can generally enroll after some minimum time, frequently as little as a month. However, enrollment is often only at the beginning of the month, or for smaller companies, the beginning of the quarter. On the day that you are getting all of those forms from the HR person, ask when the earliest date you can enroll in the 401(k) is and when the paperwork has to be submitted. I've worked for a couple of small companies that were glad to have me participating. The amount of money under management is a significant factor in the range of options they have for who's managing it and the costs.

[FMF]

The last three companies I've worked for all had a one-year waiting period.

[Anthony M Silva]

hello, im 19 and i just started my 401k, right now since im young im kind of thinking of taking some risks at it, right now i split mine 50-50 into an american balanced fund and a europacific growth fund, which ones can i take the biggest chance on or in other words are there any high risk consistant ones that have been doing well in making money?... please forward any replys to my email.... [email protected] and thanks alot for any help or advice you could give me!

[FMF]

Anthony --

Good for you!!! Starting at such a young age is one of the keys to retiring rich.

I refer all my "advice" sort of questions to JLP at www.allthingsfinancialblog.com. He's a financial planner and can answer them better than I can.

Good luck!

[Anonymous]

I am not the same anonymous commentor as above, but I agree with what he said and want to elaborate a bit. I worked for a small company recently that was very happy to have me participating in their 401(k). Our management had very open lines of communication with the employees and we got a lot of details about the options they were considering. I was a little surprised when I discovered at the end of a year of working there that my 401(k) contributions were over 10% of the total amount under management. That drove the point home to me very emphatically that I am saving for my retirement well about the average rate.

My experience is that most companies welcome participation in their 401(k). They are limited in when you can start participating by the plan manager. Usually the best case is that you can start contributing at the beginning of the following month. However, the worst I've ever seen was not a full year delay. In one plan, I was allowed to start contributing at the beginning of the next quarter after I had been there for 2 full quarters. Generally, the reasoning behind that sort of limit is when a company has high turn-over for some reason and doesn't want to deal with cashing out 401(k) accounts for a bunch of people who worked on a short term project.

I couldn't agree more with the advice to ask your HR person when your earliest enrollment opportunity is. Often you can fill out the form right at that moment and it just won't kick in until your enrollment date.

[Jeff Sinatra]

I think I would add one more point: ask your HR person about a managed account service. This is a growing trend (about 20% of companies provide a service like this). It is a good solution for those who don't want to manage their 401(k) themselves and would prefer to have a professional do it for them. I recently launched a blog focused on this subject and invite others to comment and add more ideas... In my opinion, this is where the 401(k)/403(b) industry is headed... We'll see...

[kevin]

Hi, I am not eligible to join my companies 401k plan until 1.1.07. Can i open an IRA now? What can i do with my IRA once i join my company 401k? Can i keep both or transfer my IRA into my 401k? Please advise!

[Pat H]

If you're just starting out and can't afford to max out your 401k, at least contribute to get the maximum company match. Then, whenever you get a raise, say 5%, take 1% or 2% of that raise and apply it to your 401k. You will still see an increase in your paycheck but so will your 401k. If you do this every time you get a raise, by the time you reach 30, you will be maxing out your 401k and well on your way to a secure retirement.

[Lifetime Progress]

Keep in mind that with a good bit of research and planning that greater returns can be had over time than investing in a 401k.

Note also that the stock market tends to go sideways for a multiple decade period of time and then jump up to 10 times the value within a span of one decade.

Over time the effect averages 9% or so per year, but if you buy in during sideways year 1 and have to cash out before sideways year 30, your net gain will probably be 0, or less than 0 due to management costs built into the 401k.

Investors in 401k accounts will hopefully have a horizon of greater than 40 years to help ensure that the stock market will have done at least one sideways and upward cycle during the investment timeline.

Anything shorter than that and you are basically relying on employer match for any retirement gains rather than an actual increase in the value of the investments.

Buying in with 100% employer match at sideways year 1 and ending at sideways year 30, counting inflation, would leave you with much less buying power than the equal amount will get now.

In this vein, income funds and bond funds often can beat other stock funds built around growth.

Sincerely,

Lifetime Progress . Net owner

[Sumar]

Great article, on top of that 401k savers should be aware of common IRA distribution penalties that they can face, this article explains more http://www.research401k.com/ira-penalties.html

As an example:

Early IRA Distribution Penalty

If you withdraw money prematurely from your IRA (if you are less than 59.5 years of age), this is known as an Early IRA Distribution. You will be assessed a 10% early distribution penalty on this withdrawal (on the gross amount). The IRS however does allow you to withdraw money prematurely from your IRA on special circumstances. For more on this, see Withdrawing Penalty Free Distributions from your IRA (Individual Retirement Account) If you fall under any of these cirumstances, be sure to have your IRA custodian or administrator sign and initial your Distribution Report.

[Rishi]

Obviously the sooner you start saving for retirement in your life, the more nest egg savings you have will have upon retirement. For instance take this example from www.401klookup.com And this is with a 10% interest rate compounded annually.

"From the above table, you can see that if Peter started contributing $10,000 from the age of 25, he would have a huge lump sum of $4,868,518 at the age of 65 (upon retirement). You bet, $4.8 million is a huge sum of money to have upon retirement! However, if Peter started investing at only 45 years old, he would only have $630,024 at the age of retirement (65)."

And I like your advice of "Pay yourself first." Definitely! Employees should set up automatic deductions from their paychecks and this money should be deposited in to their 401k accounts. This way you do not have a chance of skipping this month's savings because "you did too much shopping" or some garbage like that. Feel free to share your thoughts!

[Rebecca]

By the time I turn 40 years old, I should have about $120K in my 401(k). I contribute about $1200/mo, plus my company contributes about $9k/year. Based on the year 2010 when I'm 40, how do I estimate what should have in the account when I retire in my mid-60s? I'm not sure how to calculate that.

[FMF]

Rebecca --

See if this helps:

http://www.freemoneyfinance.com/2006/08/how_i_set_my_re.html