A 401(k) is a great place to start saving for retirement
because pre-tax dollars are taken straight from your paycheck. Plus, a lot of
employers will match what you contribute. Sounds easy enough. But when it comes
to investing those funds, you do have some options and the choices can be
confusing. Here's a quick and easy way to invest in 4 steps.
1. Save 10% of your
income
First, set how much of your paycheck will be automatically
transferred into your 401(k) each pay period. This can be done online with the
click of a few buttons -- and without having to talk to anybody. While 10% of
your gross annual income is a general rule of thumb, many financial planners
suggest trying to save at least 15% and as much as 20% -- especially if you're
getting a late start on retirement saving.
Because of a government cap, you might not be able to stash
the entire 10% of your income in your 401(k). You're currently limited to
$18,000 a year if you're under 50, or $24,000 if you're older. Think about
opening a traditional or Roth IRA if you want to save more,
but those accounts have even lower caps. In that case, contribute at least
enough to take full advantage of your employer's match. If your company matches
up to 3% of your income, then shoot for 3% to avoid leaving money on the
table.
2. Set your mix of
stocks and bonds
Every company's plan offers a different menu of funds. The
choices can sometimes be overwhelming. Other companies don't offer many choices
at all. But the basics of investing for retirement are fairly simple: The
younger you are, the more risk you should take on. It's a personal decision,
but some experts suggest having about 90% of your savings in stocks if you're
more than 30 years away from retirement. Someone 10 years away should have
about 70% in stocks. The rest should be in less-risky bonds, money market funds
or cash.
3. Choose your
investments...
Ideally you want some exposure to a variety of different
stocks -- companies of different sizes and from various parts of the world. But
if you don't know what you're doing this can feel like picking out of a hat. There's
no one portfolio that's right for everyone. But here's a sample that Weckbach
suggests for someone who's shooting for a mix of 80% in stocks and 20% in
bonds.
Start by allocating about 30% of your contributions to
a large-cap index fund. This puts your money in stocks of some of the largest
companies listed on a major index like the. Think Apple, Coca-Cola,
and GE. He then suggests putting about 15% in a mid-cap fund and another
15% in a small-cap fund. These will give you exposure to different sized
companies with a market cap below about $10 billion.
Then look for an international fund so that about 20% is
invested in stocks of foreign companies. The remaining 20% can go into a bond
fund. If you work for a small business, your plan might not offer a lot of
these funds. If that's the case, stick to a large-cap index fund and a bond
fund.
...Or just make it
automatic
Your company might make the decision even easier by offering
funds that do the work for you. A professionally managed fund that picks
investments might be the only one you need, according to Conor Weir, a CFP and
managing director at Retirement Benefits Group. A target date fund might
be an even simpler option. Most will have a year in the fund's name, like the
"Vanguard Target Retirement 2020," for example. Choose one with the
year that's closest to when you plan to retire. It not only sets your
investments but also automatically transitions them to more conservative assets
as you get closer to retirement.
4. Don't meddle with
your choices
While all your future contributions will always be invested
in the manner you chose, any existing investments that you've accumulated could
be thrown off balance by market fluctuations. For example, you could end up
with more international holdings than you intended, or a little too heavy on
small-cap stocks. That's why you need to check in about once or twice a year. But
other than a quick rebalance to make sure your investments are still allocated
the way you wanted, there's no reason to change anything in your 401(k) if
the market takes a dive. Retirement is a long-term investment so you
should be able to ride out the ups and downs.
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