A 401k is a retirement savings plan that allows a person to save for retirement by taking a set percentage of their earnings out of their paycheck each pay period. This money is invested and looked after by the employer. Some companies match what you invest in your plan by a percentage or all of what you have contributed to your retirement plan. A 401k plan sounds easy enough, but putting together the basis for your retirement plan when you are in your early 20s is a lot more daunting than it seems. The last thing one wants to do in the beginning of their career is take out even more money from their paychecks. Between rent, food, student loans and day-to-day expenses, taking just 5% out may seem like too much. Although it seems hard, starting your 401k plan now will really help down the road. Here are some tips on how to set it up so you can still live comfortably now, and plan for a retirement where you can live comfortably as well. Start EarlyEven before you get your first paycheck, fill out the required forms to start your 401k. Although many companies might push you to save 10% initially, It’s OK to put as little as 4% into your retirement plan. As you earn raises with your company, the amount you put away will increase, and you can continue to raise the percent you put into the plan. Get a 401k MatchAs previously mentioned, some companies will match the savings you put into your 401k plan. A company match of 50% up to 6% of pay for an employee earning $35,000 annually can boost that worker’s retirement savings by $1,050 each year. That adds up to a lot when you think about retiring after 40 years of work!If your company does not offer to match, you still want to invest in a 401k plan; not only for the savings but for the tax break as well. You do not pay any taxes on the money you save until you reach retirement. Roth 401kIn 2006 the Roth 401k plan was created. This plan allows you to place some or all of your contributions into a Roth savings plan and have it treated as after-tax dollars. This means that instead of getting the tax break of the traditional 401k plan, which makes you pay the income tax in retirement, the money will be taxed now. This in fact might be a better option for young professionals because they tend to be in a lower tax bracket than they will be during retirement. Scrutinize Autopilot SettingsMake sure you know if your company automatically enrolls you in a 401k plan or not. This is more common in larger companies and can affect you poorly if the amount they take out is too big a percentage. Keep an eye on how much is taken out of your paychecks, what fees you are being charged, and when you are allowed to make changes. Pick Diversified InvestmentsThe economy is slowly on the rise, which is good for young investors. As a young professional, you have the opportunity, with your 401k, to enter the world of investments at low prices and benefit from rising equity values. Choosing a mix of stock funds, bonds and cash that fits your personal risk tolerance is highly recommended by economists. “If the provider offers low-cost index funds, indexes are a nice, low-cost way to build a diversified portfolio,” said Mark Berg, a certified financial planner and the president of Timothy Financial Counsel. Another thing you want to make sure you don’t do is invest too heavily in your own company. Staying below 5% of your investments is recommended.
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