Key Takeaways
- A 401(k) is a smart way to save for retirement and help you reach your future financial goals.
- If you’re investing in your company’s 401(k), it’s important to understand the math behind it.
- There are four key items you’ll want to be aware of when it comes to your 401(k).
For a lot of people, math is an unwelcome four-letter word. But math is also key to understanding your company’s 401(k). If you’re investing in your company’s 401(k), there are four key math-related items to be aware of.
First is the company match, for which you need to do the math, otherwise you won’t appreciate the benefit. Many companies will match around 4% of what you contribute to your 401(k) – so if you put 4% away, they’ll put 4% away. Ignoring market factors for the sake of this example, if you make $50,000 and put $2,000 into your 401(k), and your company puts another $2,000 into your 401(k), you’ve doubled your money – and you’re using other people’s money to do that. By doing the math on the match, you’ll realize you’re getting $2,000 for putting $2,000 away. That’s a really smart thing to do!
Second, you’ve got to select the right set of funds. Exchange-traded funds and mutual funds are generally what’s available, but if you’re unsure what to select, just select the lifestyle funds or age-based funds. If you don’t want to do that, then seek help from someone who can allocate the portfolio appropriately for where you are in life.
Third, there’s a vesting schedule. This is where the employer match may come into play. Depending on the plan, there may be a vesting period of five or six years. This means that if you leave your company after two years, you might get 20% of the matching funds, instead of 100%. Each year you stay, you vest more of those funds. The amounts vary depending on the schedule and the plan, but you can inquire about this with your plan administrator to learn more about it.
Fourth, there may be the option to take a loan on your own 401(k) account. Of course, loans have interest that must be paid. While that generally isn’t a good thing, in the case of a 401(k) loan, you’re both the banker and the borrower. So even though it’s not ideal to take out a loan, at least you’re paying the interest to your own account, and that money continues to accumulate there. There may be rare circumstances where it makes sense to take out a loan on your 401(k) – you may have high credit card debt, for instance. There may be a loan provision to be aware of, as about 50% of 401(k)s have them.
So, take the time to do the math and understand these four key issues regarding your 401(k), making sure you’re set up correctly, so you can keep saving for the future. Until next time, enjoy.
