Just got a new job and 401K question

[Free4Life11]

Ok I am very young, 20, and just got a new job as a government contractor. One of the benefits is that they put $2.87 into a 401K for each hour that I work. Doesn't sound like much, but I read somewhere if you start young it can grow big. Now we also get the option of putting a percentage of our wages into it. But I don't know if that's a good idea, I have about $30K in student loans so I figure it would be better to have more cash to pay this and other bills.

Also how do I decide what the 401K should be invested in, they gave us a list of 13 things and we have to divide it up among them. I just randomly put 10% into 10 different things. I didn't have time to look at the info and it was all so confusing -- all I cared to see was what the average APR was, but there were all sorts of graphs and jargon.

 

[lindalinda]

You should definitely start putting at least enough money to get the matching funds from the company. The way pensions are being done away with by companies now, this may be the ONLY retirement young ppl end up with. Also there is a service called smart401k.com that you tell your 401k choices to and they will tell you what per centage to put in each. There is a small fee quarterly, but I think its worth it.

 

[EthansMom]

DH and I have both been contributing to our 401ks since we started our first jobs and it has certainly helped! We are in a much better position in our mid-30s than other couples we know who still aren't putting anything away for retirement.

I highly recommend putting in some of your own money in your 401k. You don't have to start right off with the maximum amount, but any little bit will help a lot down the road. Personally, I recommend starting off with a contribution that you can afford -- consider 5%, maybe? Since you'll avoid paying federal taxes (until you withdraw the money) on that contribution, your paycheck would only decrease by about 4%. Then, anytime you get a raise in the future, increase your contribution by one half of the raise -- if you get a 4% raise, increase your 401k contribution another 2%. You'll still be getting more money in your paycheck, but you'll also be putting away more money. In just a few years, you'll be maxing out your 401k.

Regarding splitting the 401k money evenly between 10 different funds, that's probably not the best thing to be doing. At your age, you probably shouldn't be in bonds -- not enough of a return because they are a low-risk investment. Also, you might be best off to avoid riskier options like "hedge" funds and International mutual funds. And you shouldn't be investing your 401k in company stock because if your company goes belly-up, you could lose your job and the money you had invested (stock price could plummet -- think Enron).

If you really don't have a lot of time/energy/patience to learn more about your different investment options, you might consider investing in a STOCK INDEX Fund. One of your ten options is probably a stock index fund that mimics the performance of the 500 INDEX, the RUSSELL INDEX, the TOTAL STOCK MARKET.

If you put 100% of your money in an index fund like the 500 Index, you won't do any better than the stock market as a whole, but you won't do much worse, either. In my opinion, getting the average return of the stock market isn't a bad way to go.

You may also have an option to invest in a fund that changes it's purchase allocations based on your age -- more stocks when you're younger and more bonds as you grow older. If you don't like the idea of just buying into an index fund, one of those funds wouldn't be a bad addition to your portfolio.

You might consider a subscription to Kiplinger's Personal Finance to help increase your investment knowledge.

Good Luck in your new job!

 

[dvcgirl]

Ok I am very young, 20, and just got a new job as a government contractor. One of the benefits is that they put $2.87 into a 401K for each hour that I work. Doesn't sound like much, but I read somewhere if you start young it can grow big. Now we also get the option of putting a percentage of our wages into it. But I don't know if that's a good idea, I have about $30K in student loans so I figure it would be better to have more cash to pay this and other bills.

Also how do I decide what the 401K should be invested in, they gave us a list of 13 things and we have to divide it up among them. I just randomly put 10% into 10 different things. I didn't have time to look at the info and it was all so confusing -- all I cared to see was what the average APR was, but there were all sorts of graphs and jargon.

Hey Freelife....first of all...just wanted to mention that you might want to post this over on the Budget Board as well. Many "financial nerds" read over there (include myself in that group) .

Yes, starting early is huge. And so this is a great thing. And running the numbers it looks like your employer is going to put in almost $6,000 a year for you....that's GREAT!

As for your student loans....what's the interest rate? If it's relatively low, you may want to throw a little extra at it, but you'll knock that out in time. I know that Dave Ramsey wouldn't agree with me, but if your loans are at a low rate, well, I'm big on starting that nest egg for the future.

I would start doing some reading with respect to investing for the long term in your 401K. Randomly throwing 10% at 10 funds may not be the best move. You are *so* young, and you want to be in fairly aggressive funds (index funds with low fees if possible). You should also have a mix of large cap, small cap funds...and then of course you want to have some of your money in international funds as well. Remember, any money you put into your 401K on your own is done pre-tax, and so it's not going to pinch as much as you think....you'll be pleasantly surprised.

Let me tell you something Free Cycle...at your age, if you begin to invest religiously, well you'll end up with a huge amount of money. All due to the magic of compound interest. I'm willing to bet that there are thousands right here on this board who wish that they could go back to being 20 years old and begin all over with their retirement savings. The key is to just do it! Just like the money isn't yours. The earlier you begin, the less you'll have to save later.

 

[Lisa loves Pooh]

Unless you have big plans to retire your student loans early--I would just sit on them with the low interest for now making your required payments.

On the budget board they talk lots about--"budgeting" of course. Some will say pay off all your debts first. I think the educ loan is okay to stick with for now.

Budget the 10% as you have for 401K (and research if you should reallocate, rule of thumb..the younger you are the more risk you can take in the investment)...you are young, you probably won't even miss it. Work on building short term and long term savings (for repairs and for things such as unexpected loss of job). Once you have those built up quite nicely--work on reducing that student loan debt.

Of course if you have other debts, this may change it up a bit.

 

[Free4Life11]

And running the numbers it looks like your employer is going to put in almost $6,000 a year for you....that's GREAT!

As for your student loans....what's the interest rate?

Well, I'm actually only working part time and I choose my schedule each week, but still better than nothing. Since it is a government contractor job, they are required to give me $2.87 for each hour worked as part of some act that was passed in the 90's.

I don't know if there is a limit on the contribution I can make -- it just said 1%-80% of your paycheck.

Most of my loans are federal loans with no or low interest rates.
I do have one private loan that is at 10%. It's about $5000. That's a rough one -- it started out around 7% and has gone up steadily. I am currently just paying the interest as it accrues.

Regarding splitting the 401k money evenly between 10 different funds, that's probably not the best thing to be doing. At your age, you probably shouldn't be in bonds -- not enough of a return because they are a low-risk investment. Also, you might be best off to avoid riskier options like "hedge" funds and International mutual funds. And you shouldn't be investing your 401k in company stock because if your company goes belly-up, you could lose your job and the money you had invested (stock price could plummet -- think Enron).

Mainly I did the 10% thing because we HAD to fill out the form last night and we were kind of rushed. I intend on changing it once I have a chance to examine each of the choices.

I don't really know if company stock is one of our choices -- all they did was give us a sheet from JP Morgan Chase that listed thirteen things, for example "JP Morgan Investor Balanced Fund," etc.

Thanks for the advice!

 

[Free4Life11]

Ok I re-read the information. They are required to contribute $2.87 per hour due to federal law. I don't know if the copmany pays this or the government pays this. Either way, this money is "100% Vested" whatever that means. Any employee contributions are also 100% vested.

There is a maximum employee contribution of $14,000 per year. For every dollar I contribute, up to 6% of my compensation, they will contribute 50 cents, but their contributions are only XX% vested based on the number of years I have worked.

 

[Dan Murphy]

Take some time to read the material given to you, do the risk profile, invest as it suggests, asset allocate. Don't pay too much attention to the past rates of returns, all the asset classes; large, mid, small, international stock classes, cash, bonds, will do fine over time and the dollar coast averaging aspects of a 401(k) takes advantage of the downturns that will occur over time in all asset classes. Take and set aside an hour to go over the materials, they were produced and given out to help answer the questions you are asking here, but are specific to that plan. If you have a plan advisor, feel comfortable to ask for help, that is what they are there for. As for a limit, 100% of income, maximum $15,0000 2006 ($14,000 was 2005), in your plan's case, 80%, $15,000 max.

Do you plan on working there very long or is this temporary?


(not to be taken as financial advice)

 

[Free4Life11]

Do you plan on working there very long or is this temporary?

Until I graduate and find a job, but at the rate I'm going that could still be another three years

 

[tmt martins]

If you start it right away you will not miss it .

Also you can take bigger risk now that you are younger with it as it grows you keep a certain % in a safe fund and then play with some in the riskier funds.

Take advantage of this you will most likely not have enough off of SS by the time you retire.

 

[Dan Murphy]

What is the vesting schedule on the match?

 

[swea_pea1]

Ok I re-read the information. They are required to contribute $2.87 per hour due to federal law. I don't know if the copmany pays this or the government pays this. Either way, this money is "100% Vested" whatever that means. Any employee contributions are also 100% vested.

There is a maximum employee contribution of $14,000 per year. For every dollar I contribute, up to 6% of my compensation, they will contribute 50 cents, but their contributions are only XX% vested based on the number of years I have worked.

100% vested means that if you leave the company, that money is yours to take to either your next company's plan, or for rollover to an IRA, or as a taxable distribution. A taxable distribution is when you get the money in your pocket, but since you weren't taxed on the money going into the plan (your reportable wages are reduced), then you are taxed when they are taken out - plus a 10% penalty if you are under 59 1/2 at the time of distribution.

Your employer match looks like it works on a vesting schedule, increasing in percentage for every year worked. The most common one I've seen is that the employer contributions are vested 20% over each year for 5 years (so 20% in the first year, 40% in the second, 60% in the third, etc.). For example, if we use that vesting schedule, and you terminate your employment after three years, you will receive 100% of your employee contributions but only 60% of the amount that the company matched.

I hope that wasn't too confusing! In my opinion, you can never go wrong participating in your employer's plan. You're getting 50 cents on the dollar...where else would you get a 50% return on your money?

Usually employers allow changes to investment choices at any time (or at least periodically throughout the year). If your apprehensive about what to choose but still want to take this opportunity to get into the plan, my opinion would be to choose something with very little risk (like a money market fund) until you can hash it out later with an Investment Advisor and make choices that more closely align with your retirement goals.

Good luck to you!

 

[edcrbnsoul]

Your in an enviable position you are right about compound interest at your age, if you stay away from debt and work the compounding interest you can retire in a great position.

I would suggest diversifying your investments. This lowers your risk. You must spread your investments across the board, so that you are not risking all of your money.

Aggressive diversification
· 25 percent invested in Growth and Income
· 25 percent invested in Growth
· 25 percent invested in Aggressive Growth
· 25 percent invested in International

Non-aggressive diversification
· 25 percent Balanced
· 25 percent Growth and Income
· 25 percent Growth
· 25 percent International

 

[ibouncetoo]

If your company match is for up to 6%, try and put that much in. Don't put in any more than that however....anything over that should go towards your 10% loan. If you can't quite to 6%, get as close as you can, then with each raise, up your % till you can hit 6.

For anyone out there who isn't 'joining' their company's 401K plan.....no matter how little you may be able to put in.....contribute SOMETHING. Not participating in a 401K is like turning down a raise.....and you'd never do that right?