Many employers offer a 401k plan as a benefit to their employees. It is up to the individual, however, to decide how the 401k plan fits into his or her retirement plans. The sheer volume of 401 k options available may give some people pause, but if you take the time to understand your retirement goals and your 401k retirement options, you can ensure that you choose a plan that fits in with your overall retirement savings strategy.
The easiest question to answer concerning a 401k plan is: should I participate? The simple answer is almost always “yes”. If your employer offers matching funds, the answer is (with very few exceptions) “YES!” Many companies contribute fifty to seventy-five cents per dollar that you dedicate to your 401k plan. Essentially, it is like having a machine that gave you $1.50 for every $1 you put in. Of course, you would put as much money as you could into such a fabulous machine. A 401k with matching funds works like that machine, except that the money goes directly to your retirement fund.
Your personal retirement plans will depend on a number of factors, but none impact the mix of your portfolio as much as your age, or more specifically, the number of years until your retirement. Like your other investments, the 401k has an array of options with varying degrees of risk and reward. The earlier you begin investing in your retirement, the more short-term risk you can tolerate and the greater the potential reward when you retire.
Most 401k offerings include a low-risk, short-term option, a medium-risk option, a higher-risk long- term option, and a company stock option. There may be other shadings as well, like your degree of involvement and the type of funds. It is not uncommon for employers to offer literally dozens of plans to their employees. With most plans, the individual employee can allocate a portion of their investment among several plans.
Depending on your retirement plan and your individual situation, you may choose to split your portfolio between money market funds, stock index funds, international funds, and company stock. The first two would give you stability. The latter pair would give you a strong upside, but with more significant risk.
Over time, you can re-allocate your funds. The typical pattern is more aggressive funds in the beginning, switching over to safer programs as your retirement date looms near. A twenty-five year old with forty years until retirement may buy heavily in company stock and aggressive growth funds. By the time the same investor is sixty, he or she will probably want to switch to fixed, money market, or bond funds in order to preserve his or her gains over the previous three and a half decades.
There are few hard and fast rules regarding how your 401k will fit into your retirement plans, but here are some generally agreed upon principles to consider:
By following these guidelines and choosing a plan (or plans) that fits you in every way, you can count on your 401k retirement benefits as an integral part of your overall retirement plan. Choose carefully your mix of plans and your balance between risk and reward. Review your choices annually and watch your retirement savings grow toward your goal.