Easy Steps To Setting Up Your 401(k)
- Mr. Organic
- Jul 13, 2019
- 3 min read
Utilize Your Retirement Plan!
Investing in your companies 401(k) plan is common practice now that only about %13 of Americans have a pension!
Most companies also offer a match to incentivise your contributions. My clients often ask me about what percentage to contribute or options to choose, and this is what I've laid out for you here.
For simplicity, the list below explains how to set up your 401(k) or other retirement plans so you don't have to keep changing it or managing it over time.
What To Know:
Start with a higher percentage of your income, you wont miss it! A typical match is somewhere between %2-%5, and you should do more!
It is suggested when you first start in your twenties to invest %15-%25 into your retirement. Investing only for the match will not provide enough income for your retirement!
Here is an easy 7 step process to understand if you are prepared to start retirement investing - How to Manage Your Money Like The Wealthy for Individuals and Households | Millionaire Mindset
Invest in Target Date Funds as they will automatically become more conservative the closer you get to the year of the fund chosen. This makes it so your investments automatically change in risk without you having to do anything.
Keep in mind, Target Date funds are normally not managed, and are typically exposed to the entire downside in the case of a market correction.
Utilize Roth 401(k) if available and if your company will still pay match money. With the Tax Cut Jobs Act of 2017, we are currently in a 'tax sale,' and now could potentially be the best time to invest after tax. See How To Pay 0% Taxes In Retirement for more information.
Save enough, but do not overfund your 401(k). Retirement vehicles have an access age of 59.5 years old, and a 10% penalty+income taxes to access before that age.
Here is a quick savings goal by age to see if you are on track!
Because of this age restriction it is imperative you have other accessible pre-retirement assets. Using Automation & Technology To Force Successful Financial Habits, explains automatic investing into non-retirement vehicles in more detail.
It is very important that you understand your Options For Handling Your Old Retirement Accounts (401k, 403b, 401a, Employer Plans, Etc.).
There are many advantages to an IRA versus a 401(k) plan. For Example, the first time home purchase of $10,000 does not apply to distributions from a qualified plan like a 401(k).
Work with a Trusted Financial Adviser to understand if a rollover is the best option for your situation.
Hardships distributions: 401(k) plans are not required to provide for hardship distributions, but may do so in some cases. The hardship must be due to an immediate and heavy financial need.
You can take a 401(k) loan of up to 50% of your vested account value.
Some plans allow in-service withdrawals, typically at 59.5 years old, which will let you rollover your plan or make distributions while you are still working.
This can be very advantageous when looking to access more investment options (that may not be included in your current plan) or specialized income planning for your retirement nest egg.
Thank you for your time!
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