You’re done with school now. You have your first job. And you’ve just become able to start contributing to your employer-sponsored 401(k) plan now (k). Then what? start saving for retirement soon as possible.
When you think about it, you have two options to choose from while start saving for retirement.
How Much To Start Saving For Retirement
Experts say that you should save just enough to get your company to match your savings. Most employers will either match 100% of your contribution up to 3%, 50 percent of your contribution up to 6%, or 100% of your contribution up to 3% and 50% of the next 2%. This is the most common way that employers will do this.
The full match from your employer might not be enough for you to save enough for a comfortable retirement in 40 years. To be more specific, no matter whether you were automatically set up with a default deferral rate for your 401(k). Consider putting 15% of your income into a retirement account. This includes the amount your employer will match.
It will give you the best chance of meeting savings goals by certain ages that show you’re on track for a good retirement. T. Rowe Price says that by the time you’re 65, you should have 11 times your salary saved for retirement. Fidelity Investments’ rule of thumb is the same: Save 10 times your income by the age of 67, and you’ll be done.
How to invest your 401(k)
A qualified default investment alternative, or QDIA, is what your money is likely invested in if you were automatically signed up for your 401(k). A target-date mutual fund, for example, is a good example of what a QDIA is. Most of the time, your employer is automatically putting you into a target-date fund that corresponds to the year you expect to retire. For example, a 25-year-old who wants to retire in 42 years would be in a fund that has a target date of 2060 or 2065, like a 2060 or 2065 fund.
Because target-date funds use a mix of assets that become more conservative over time, this is a big reason why they’re good.
Why not use the target-date fund instead of a different money source? Most of the time, you’ll have three or four options: 401(k) menu: 20 or so investment choices; target-date fund; brokerage account that lets you build your own portfolio with all types of investments; or a managed account, where a professional adviser creates and manages your 401(k) plan for you and charges a fee to do it for you.
Different Type Of Funds
There are a lot of different types of funds out there. If you’re young and starting out and don’t have money in other types of accounts, a target-date fund might be best. Your time frame should at least match the mix of assets. It might be a good idea to think about either a managed account or building your own portfolio as you get older, when your money grows, and when things get more complicated.
If you decide to build your own portfolio, think about your time horizon, risk tolerance, and investment goal, as well as your ability and desire to rebalance your portfolio when it’s time to do so. Besides, don’t, if you decide to build your own portfolio, put all of your money into the same fund (k). This strategy doesn’t really make sense for you.
We hope that in the best case, you’ll also think about how much you have in the way of both human and financial capital as well as how much you’ll get from Social Security when building your retirement portfolio. Are You a Stock or Bond? Moshe Milevsky says that if your human capital, the income from your job, isn’t safe, you should invest less in stocks and more in stocks. If your job is stable, you should invest more in stocks.
If you’re young and think you’ll be in a higher tax bracket in retirement, and your company has a Roth 401(k) option and matches your contribution, think about saving for retirement with that account instead of a traditional one.