Question from a reader, “Kim, I have graduated college and am working. How much should I be putting into my 401K that they are offering me?”
My answer: First off, congratulations on being employed in this economy! Kudos to your company as well for keeping their 401K intact. The common wisdom is to maximize your contributions and save in your 401K as much as they will let you put it. The rationale is that when you retire say 30-40 years from now, whatever bumps in the economy that we are going through now (bumps? they are more like mountains) will look like nothing looking backwards in time.
The reality is that you need to live in the here and now.
If you can’t afford to max out your 401K, at least start putting in something, especially if your employer is offering matching money. That is free money that you are getting and that accumulates over time. If you are scared about putting money into the stock market, check with your human resources person or plan manager and see if they have some sort of fixed interest rate fund (most do) that you can park your money in for the short term. Always do your own due diligence and remember that you can be pretty forgiving with yourself if you are patient. You are starting early in your retirement savings and that in of itself is a good thing.
If you are married (and I am guessing that you are not) and have two incomes, it might be worthwhile to sit down with a financial planner and/or a tax professional so you can see which is the best way that you can save money and get the best situation you can in terms of taxes.
A lot of people don’t quite seem to get it right (as pointed out often in this blog).
In the long term, any money that you can park now is a good thing. Remember though as investment warnings state, “Past performance doesn’t guarantee future returns”. A lot of things can happen over thirty years and it pays to still watch what your money is doing and not forget about it.
Also, you didn’t mention if there was a grace period where you will be putting money in but won’t be 100% vested. Generally, check with your plan manager and read the timing of how and when you are actually fully vested in the plan and see if there is any tiered matching or vesting as you stay with the company.
You are asking a great question at a great time in your career. All the best and keep me posted how things go!
Worried about the economy? Looking for a part time job? Please check out my book, Practical Money Making for suggestions about how to ride through the hard times.
Kim Isaac Greenblatt
Kim answers a question about saving money in a 401K.