This is a follow-up to the post Don't be Poor When You Get Old.
I gave an outcry in the previous post. In case you missed it, here is the gist of it:
Invest in your retirement account, right now. No matter what. Even if you can get $50 a month into your account, you'll turn that into hundreds of thousands by the time you retire.
You can literally turn $6,000 into $150k!
(See dinkytown.net to run your own numbers)
But how do you get your 401(k) set up? What should you do?
Well, there are a few simple steps. This is a long, informative post. If you don't want to read all of it, here's the steps in a nutshell.
1. Figure out if you have a 401(k) available, and whether your employer offers a match
2. Sign up and take full advantage of the employer match
3. Invest in a target retirement date fund, or do more research and build your own portfolio
4. Retire in style
1. Figure out if you have a 401(k) available, and ask how to sign up
Contact your HR representative or Manager, and ask if your company has a 401(k) available.
You can use the following e-mail or script:
Dear [Insert HR Rep or Manager Name],
I have recently been thinking about my financial future, and would like to begin investing for my future. I have heard that I may have access to a 401(k) through [Your Company], and would like to ask a couple of questions.
1. Does [Your Company] offer a 401(k) program to employees
2. If so, do I qualify to participate?
3. What are the necessary steps to set up my account, and begin having automatic withdrawals sent to the account?
Lastly, I have heard that some companies offer some sort of match as part of their 401(k) programs - does [Your Company] offer this benefit? If so, I would love to hear more about the options available to employees.
Thank you in advance for your help.
Kind Regards,
[Your Name]
Phone Script
HR Rep: Good Afternoon, this is Pat
You: Hi Pat, this is [Your Name]. How are you doing today?
Pat: I'm fine, how are you?
You: Just Dandy! Pat, I have a couple of questions about some of the benefits available to employees, and wondered if you might be able to help me out.
Pat: That's what I'm here for!
You: I have recently been thinking about my financial future, and I was wondering if [Your Company] offers any sort of 401(k) program for employees.
Pat: Why yes we do! We have a 401(k) set up with a generous match for all employees who work at least 30 hours per week.
You: Well that is great. What would I need to do to get my account set up?
Pat: Well, there is a form we will need you to fill out, which will authorize us to begin deducting 401(k) deposits from your paycheck. Once your account is set up, though, the account can be fully managed online.
You: Perfect! Could you send me a copy of the form, or even better yet, is there a website where I can print it out myself?
Pat: Well, I can certainly send you one, but the easiest way is to download the form from www.yourcompany.com/401k. Once you have it filled out, you can send it in to the address on the form, and we'll get you all set up.
You: Great, I'll do that right away. I have one last question - you mentioned a match for employees who work more than 30 hours. Currently, I work 32 hours a week - could you tell me more about the match?
Pat: Certainly - [Your Company] understands how important saving for retirement is, so we will match 100% of your contribution, up to 2%, and another 50% for the next 4% [Don't worry about what this means - I'll explain a little later in this post]
You: Well that certainly is generous! Thanks so much for the information Pat. Is there anything else I should know about the 401(k)
Pat: Nope, that's it, just get the form in to our office and we'll get you set up. And make sure to contribute at least 6% if you want the full match!
You: Well thank you for your help, I'll get that in to you right away. Have a great day Pat!Now, if your employer doesn't offer a 401(k), then you'll want to set up a Roth IRA. The simplest way is to walk into your bank and say "I'd like to open a Roth IRA". They'll take it from there. If you want to have a little more control, understand what a Roth IRA is, and how to handle it yourself, here is a great post from Get Rich Slowly: How to Start a Roth IRA (and Where to Do It)
*click*
If they do have a 401(k)...
Step 2: Sign up for your bloody 401(k)
This is an easy one - if you followed the instructions in step 1, then you know exactly how to sign up. Don't do it tomorrow, don't do it next week, just take the 5 minutes and do it today. This is not a thought provoking exercise, so you should not wait to complete it - just get it done already!
You should contribute at least enough to get any employer match that you have available. So what is this employer match, and how do you interpret it. In a few words, an employer match is free money.
If your employer offers 50% on up to 6%, what does that mean? That means that for every dollar you put into your 401(k), up to 6% of your salary, your employer will put another 50 cents in there for free. What does this mean for you? In 40 years, it can mean an extra $400,000 to retire on!
If you get a 100% match instead of the 50%, then it's even better - it means you get a dollar for dollar match. For every dollar you contribute, your employer will give you a dollar. Isn't that incredible!
I recommend contributing enough to get the full employer match, but remember, if you can only contribute $50, or even $10, it's a good start. Begin with that, and then make it a goal to increase by a little bit whenever you can (an extra 5 dollar every month until you are getting the full match, perhaps?)
Step 3: Invest the Money Wisely
Okay, you have a retirement account set up. For starters, you can brag to your friends, and even be a bit snobby. "Well, my retirement portfolio is already shaping up quite nicely" They'll be jealous...trust me.
But now that you have money in there, you can invest it in a number of mutual funds - exciting, right? Scary? Horrifying? Making you wish you had just kept spending that money on video games and beer?
Okay, here's your trick - find the target date fund (this can go by a few different names) that coincides with your age. This is the simplest way to invest, and works for 85% of the population.
Basically, you put your money in a specific fund based on when you want to retire. Since I was born in 1988, then 1988 + 65 years = 2053. I would invest in the 2050 target date fund. Don't pull the "I plan on retiring at 40" crap, just take your birth year + 65, and be done.
What this does is it has the company that runs the fund take your money, along with billions of other dollars, and invest them the way that someone your age should. This means they will invest in a proper mix of domestic equities, international equities, t-bills, muni's, REIT's, TIPS, etc.
If that last sentence made your head spin, then a target date fund is right for you.
If you want to create your own portfolio, then that is beyond the scope of this post, and you will need to do your own research.
Here's a start:
Rebalancing & asset allocation: Critical for investing. So why don't you do it? by Ramit Sethi
Retire Earlier by rebalancing your 401(k) with the Swensen asset model by Steve Mz
If you're lazy...go with the target fund.
Step 4: Retire in style
Need I say more?
Disclaimer: I am not a financial planner. This post is for informational purposes only. You are responsible for any financial decisions you make.
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