The Basics of 401k Accounts

If you listen to the news, you can't help but hear that Social Security will be bankrupt by the time Gen X is ready to retire. That is why you need to take control of your future. You should start soon. You could start today.

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         There are just a few basics about 401ks. Not much to master because the government has made it easy to save for retirement. Unless you are self employed (and there is a retirement account for you -- it's called an Individual 401k account), your company offers a 401k plan. Signing up to participate in your company's 401k plan is simple. It is usually a single page form. The most important part of the form is the part about allocating the money you invest. If you are in your 20s or 30s, you can handle more risk, so pick aggressive growth funds like emerging technologies or international funds. If your tolerance for risk is lower (no matter your age, do what feels right to you), you can choose a blue chip fund or balanced fund. You could even put some or all of the money into a money market, which is the lowest risk possible.

         Risk and Return go hand in hand. If you choose a riskier fund, your return on investment could be significantly higher than if you picked a low risk fund. You could see increases of 15% to 20%. On the other hand, you could see losses in the same ball park. Time minimizes risk. Over time the stock market levels out from the ups and downs, which is why if you are just starting out in the workforce, you can afford to take risks. Someone like me, in their mid-40s, can still take some risks, but we don't have the same amount of time before retirement.

         A 401k is considered a tax shelter because you are investing now, with pre-tax dollars. When you are ready to access the money, you will be in a lower tax bracket. The money goes from your paycheck to the 401k fund before you ever see it. So saving for retirement gives you a slight tax break now because some of the money you earn is not being taxed today. There is a psychological benefit to contributing to a 401k, too. Since you never see the money, you can invest the maximum amount allowed by law and never miss it. Your paycheck is your paycheck is your paycheck, so who's to say that it is $80 shy every two weeks?

         There is a provision for moving the money to a new 401k account when you switch jobs. Make sure you do this so that all your money is concentrated and working for you. The form to rollover your 401k is almost as simple as the one you use to start your account. Just check with your old companies' benefits department, or Human Resources, and they can give you the information you need to make sure the transfer happens.

         That is really it for 401ks. Pretty straight forward, right? One last thought about saving for retirement: start young and you will be amazed at how much your money will grow given time. Slow and steady wins the race.

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