If someone can please give me some tips on investing in 401k plans. What should I keep in mind while doing so, what are some things I need to looking out for so I don’t fall on my face?
The company I work for puts in 50 cents to a dollar for up to 6% of your income. I am in the mid 20s and so have a long way to go for my retirement.
Mid 20's is not that young. If you start now, with compounding you will be in an ok position. Better than one who starts in late 20's, definitely.
The biggest advantage of 401k is that its tax-deferred. So you don't pay income tax on the 401k portion when you are getting paid every pay period. You will pay tax on your withdrawl.
Anyway, most 401k managers provide a lot of online guidance. Both in terms with your retirement goals and investment strategies. Check on the website of your 401k manager (Charles, Morgan etc), and look at their tools. They will generally provide a short quiz to find out your knowledge about investments, your investment style (aggresive, moderate or low risk). Based on your answer, likely they will put you in a suitable investor-group and provide advice on what kinda portfolio you should maintain. The breakup of portfolio typically mixes, stocks, bonds, etc; and depending upon your aversion to risk, the investment manager will provide guidance on which percentage of your investment should go in which bucket. You can then manually override, at any later point.
If you leave your employer then you will need to roll over your 401k. Its not as simple as cashing a check from a bank, but is no longer as difficult as it once was. A lot of investment houses provide guidance and tools to roll over your IRA, so you keep the tax benefit.
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*Originally posted by Faisal: *
If you leave your employer then you will need to roll over your 401k.
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depends how much have ypu accumulated in the 401K and the employer's practice. You can leave a company yet still have money sitting in that company's 401K.
ahmedjee
you did not talk about the vesting schedule of the employer match. itr could be a cliff, i.e. any employer contribution become yours after you ahve been in the company for 5 years. it could be a graduated vesting, i.e. 20% vesting first year, 40% 3nd year etc. so in teh first case if you leave the employer in year 3, you take zero of the employer match with you., in the secind case if you leave in year 3 you take 60% of the employer match.
a few minor issues with 401K. would you be making more, or less when you retire? if you would be in a higher income bracker at retirement age, then its better to get into a Roth IRA than a 401K, because teh contributions are post tax and there is no tax on the proceeds when you tap into them at retirement.
My company offers it's 401k through Merrill Lynch. I looked at the brochure and they have 4-5 categories of investment with low to high risks. Even though they suggest that at my age I should be a good risk taker but I guess I am moderate, so will probably invest in middle of the row stocks. Bonds have a fixed rate of return and so can’t take part in that.
I checked on the vested issue (thanks to pointing out by Fraudia Bhai) and according to the papers I will be 100% vested come three year anniversary which is only a few months away. So, that's good.
I guess I haven't looked into IRAs enough to make a judgment. If someone can please give a brief overview of IRA vs. 401k, it will be really helpful.
ahmadjee... don't just read the brochure. Check out Merril's 401k website (it should be linked via your company's intranet or something, with a secure access). They will have a lot more tools there than a skimpy brochure.
just as a note, you are more liable to do long term with the higher risk investments then the low grade ones. Just make sure the portfolios are diversified and you should be fine. At your age you shouldnt even be thinking about investing in anything as low risk as bonds. On average I think the stock markets over the last 30 yrs has had 7% annual returns which you should be aiming for in a minimum.
I am bit confused that some of so called I Banking members here arent contributing here? Isnt this where they excel?
I banking is as diverse at allocation in a 401k account.
As hmcq said go for a more aggressive approach. You are young so you can afford to take higher risks. You may even go for the high-yield bonds area (also called junk bonds) and such. Leave the blue collar stuff for when you hit 40 and above.
I am not sure if that mantra is quite true tho. Some credence to market realities have to be made. 20% FI and 80% equities till you are 32-40. Then keep shifting the portfolio more to FI as you get older.
Well, if your manager is good you can make some major killing in fixed income. Equity hasn't been doing that well for the past few years hence I'm keeping clear of the that for the time being.
equity implies not only US equities but also international equities. The Asian market has done reasonably well and I believe Morgan Stanley offers equity equivalents for the whole region that you can take on just like you would normal equities. Also as a base you can invest in spdrs which are basically stocks tracking indexes instead of bonds to take someof the risks out. Also since I believe there is a correlation between the indexes and inflation, at the very least your money will be keeping pace real value wise.
Mats- Quite true. I bankers do a lot of different things I am assuming you are not knowledgeable in these matters? There are a couple of other I Bankers too here btw.
What are equities? The only equity I know is house value equity that you build while paying your mortgage.
And I am still waiting for someone to give me a 'IRA vs. 401k for dummies' ... lecture (please)
ahmedjee
IRA are of 2 types
Traditional
Roth
Traditional IRA works essentially in the same manner as yer employer 401K where u make investments on a pretax basis. for a Roth IRA you will make payments based on a post-tax basis.
in a conventional IRA/401K the proceeds are pre-tax and you pay taxes when you wihthdraw from 401k upon retirement.
in Roth IRA the investment is post tax so there are no taxes to pay when you withdraw at retirement. It has some estate benefits for beneficiaries as well. because beneficiaries of a traditional IRA or 401K will have to pay taxes, not applicable in the case of a Roth IRA
a regular IRA is better for you if you will be in a lower income category when you retire, this way you will pay less tax than you pay right now.
In some cases you could actually be in a higher tax category at retirement age than you are now because maybe you have started a business by then which is bringing in more money than you are makign now, or you have less dependents.
the traditional IRA vs a Roth IRA preference can vary throughout different stages in life.
There are max income limits to qualify for a Roth IRA, it used by be $110K/year if single and $160K/yr if married. also in either types of IRAs your max contribution/year is $3K, versus a 401K which has a limit of $13K in 03 and will be raised to $14K in 04. some 401K plans allow you to make catch-up contributions which are higher than you annual allowance for a 401K so u can make more contributions, but that is not offered under all programs.
and equity is basically an instrument of ownership in a company..stock ownership/..common or preferred..etc.
bizzatch ran away, before i gave him a bill for my services.
desi kaheen ka
Re: 401k Advice
The numbers for this quarter are in and I barely break even. Any advice for the next 6-18 months?
Re: 401k Advice
invest in REITs :)
If someone can please give me some tips on investing in 401k plans. What should I keep in mind while doing so, what are some things I need to looking out for so I don’t fall on my face?
401Ks are tricky. I'm glad you asked about them. If you dont know much about them, I found an article you'll find useful. Here's part of it -
Feeling like a dummy when it comes to making decisions concerning your 401k? The history behind the 401k plan might get your headed in the right direction. 401k for dummies is actually the best place to start when looking for answers to questions on retirement and investing.
In the United States of America, a 401(k) plan allows a worker to save for retirement by depositing the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. The employee decides to have a portion of his or her wages paid directly, or deferred, into his or her 401(k) account. In participant-directed plans, which happens to be the most common option, the employee can choose from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. See? 401k for dummies. It’s apparent that many companies' 401(k) plans also offer the option to purchase the company's stock. This is nice because the employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested. The title 401(k) references a section of the Internal Revenue Code.
If you want to read the rest of the article you can here - 401K-advice.org
There are also many other articles about 401K there too. I think it'll help.
Let me know how it works for you.