So, you landed the nice job with the big company, but you’ve been bombarded by human resources. They’ve thrown a hundred and one different benefits at you each with its own set of options. Choices are nice, but sometimes it can become a little overwhelming, especially for your first full-time job. One benefit that you don’t want to pass up is a 401(k) plan if it’s the right type of plan. The days of being loyal to one company and receiving a pension at the end of your time with that company are long gone. Even parents started to see the pension fade away in their working careers. Now, YOU are responsible for your retirement, but I think that is a good thing. I am all about personal responsibility. I’d rather hold the key to my retirement rather than some human resource manager in a cubicle. Here are four rules for investing in a 401k account if your company offers one.

Always Take The Match

In the above paragraph, I said not to pass up your companies 401k plan if it’s “the right plan”. The reason that I said this is because you need to first make sure that your company offers a match for your contributions. If they don’t offer a match, then you might not want to contribute to the 401k. The reason that I say this is because a Roth IRA would be the better option. You have free reign to invest in whatever you want, and when you take the money out at retirement, it won’t be taxed. The 401k contributes pre-tax dollars, but the money is taxed when you take it out at retirement. I’d rather be taxed now, rather than later on in life. However, if your company offers any sort of match, you ALWAYS TAKE THE FREE MONEY. It is a no brainer. Sign up for your company’s plan, and start collecting the free money. If you’re wondering about what the match should be, it varies based on what the company decides. My company will match 50% of every dollar that I contribute up to 6% of my salary. So, if I contribute 6% of my salary per year, I receive 9% into my account. Pretty sweet, huh? Don’t ever pass up contributing to a 401k that offers a match.

Invest Aggressively When You Are Young

If you are under 30 years old, I recommend investing aggressively with your 401k choices. Your 401k plan will typically have a range of investments varying from aggressive to conservative products. Choose growth stock mutual funds with a 10 year track record of earning 10% or more. Index funds are also a good mutual fund to choose, because they follow time-tested indexes such as the S&P 500. You can afford to be aggressive with your investments when you are young, because you have plenty of time to ride out the waves of the stock market. You are in it for the long-term, so one bad year in the stock market isn’t a big deal to you. If you pick investments that are too conservative at a young age, you will leave too much money on the table. Once you get older, you can start adjusting your investments to more conservative products.

Start Contributing NOW

Compound interest is your best friend. If you invest $200 a month for 10 years from age 25 to 35, then never invest another penny for the next 30 years until you are 65 years old, you’ll end up a millionaire with $1.04 million dollars. If you start investing $200 a month from age 35 to 65 for the next 30 years, you’ll accumulate $452 thousand dollars. That’s less than half of what you will make for only contributing for 10 years!

Never Borrow From Your 401k

It’s a bad idea to borrow from it. This is your retirement account. Don’t even act like you have this money. Think of it as untouchable. If you do borrow from it, you’ll have to pay your current income tax rate on the money taken out, plus a typical 10% penalty fee. That could be as much as 40% taken from you right off the top! It’s not worth it. I know there are some programs that allow you to borrow from it for a down payment on a house and they might waive the penalty fee if you prove that you used it for a down payment. This isn’t so bad, but I’d rather just save up for the down payment separately. Only borrow from it if it’s a dire emergency such as needing to save your house or pay for a medical emergency.

I’ve made my case. Now, you can feel more equipped when you have to fill out all of that benefits paperwork. In terms of how much you should contribute, you’ll have to work that out by considering your monthly budget. If you’re debt free and you have low monthly expenses, putting away 15% of your salary is a great way to rack up a ton of money in a short amount of time. But, if you just want to start putting something away, i’d say 4 to 6% is a good start. If you have any other questions regarding your 401k, feel free to contact me.