Having a 401(k) can be a huge benefit if you take advantage of it. More and more millennials are acquiring jobs that give them a 401(k) package, but the problem is that not all of them know how to properly handle it. While it’s never too late to start saving towards your 401k, if you take advantage early enough you can make it go a long way. Here are a few key things to know if you just got a brand new 401(k).
The first thing you want to think about when looking at your 401(k) is how much money you want to save each time you get paid. They call this a “deferral”. There isn’t really an ideal amount of money that you should put away, but what you should do is try to save as much as you can afford without hurting your other financial areas. Something to think about is if your employer does any matching contributions. If they do, it’s smart to try and take full advantage of it. In most cases, a 401(k) match is around 50% of the employee’s contribution and will cap out at 6%.
Another thing to think about is what kind of investments you’ll want to make. Some people say it’s best to be agressive in the early stages of your saving, and that you want to slowly shift to something more conservative as you get closer to retirement. This is typically true, but it can also depend on how much risk you can deal with. There are two types of risk measurement to consider, which are Risk Capacity and Risk Tolerance. Capacity is the measure of how much risk you can afford while tolerance is how much you’re actually comfortable with. By assessing your risk tolerance, you’ll have an easier time choosing the best 401(k) investments for you.
Finally, we have time, which tends to make the biggest impact. Time is important because of something we call compound interest. Compound interest is more or less interest that goes towards buying more shares of investments, which then grows and earns more interest as the process repeats. Over time, you’ll also want to periodically rebalance your portfolio as well as increase your deferral package whenever you get a pay raise.
Starting your first 401(k) plan can be daunting and confusing if you’re not sure what you’re doing, but if you take proper advantage you’ll be setting yourself up for plenty of success. These three points are some of the most important things to know when you get your first post-college job with a 401(k) package, so try to take advantage and set yourself up for the future as soon as you can.