Part One: Money Management in 1 Minute – Automatic Enrollment in 401k

If you’ve started a new job in the last 3 years, you may have been enrolled in your company’s 401k plan without choosing to do so. A law was passed a few years ago that says that companies can sign up new employees automatically in order to help them save for retirement. The only effort an employee has to put out is if they don’t want to take part. A new employee can opt out by going to HR and requesting not to be signed up for a 401k plan. If you choose not to take part in your employee sponsored 401k plan, please begin an Individual Retirement Account (IRA) as soon as possible. Contributing just $150 per month  from age 25 to a IRA that invests in mutual funds and earns an average 8% interest rate per year will net you a cool half million by age 65. The bonus? About $455,142.18 will come from compound interest! You can open many IRAs with $0 opening deposit by signing up for automatic monthly contributions of at least $50. Imaging how much “extra” money you’ll earn if your employer matches your contributions?

Part Two: Reader Question

I keep hearing that taking part in the 401k at my job is a good idea, but I’m worried about the stock market tanking plus I need my money now.

I definitely hear your concerns, however investing in the 401k at your job is a great idea, especially if they match your contributions.

In the old days, after you worked for a company for a set amount of years, you earned a pension. This money helped you pay for your living expenses after you were done working. This is no longer the reality for most companies, therefore it is up to you to take responsibility for your retirement income by planning ahead. One easy way to do that is by adding monthly contributions to a retirement account. Whether you take advantage of an employer sponsored plan or open an Individual Retirement Account with a mutual fund company, it is imperative that you begin planning now for your retirement. Some companies even help you along, by “matching” your contributions up to a specific percentage. Don’t walk away from this free money.

Stocks and bonds go up and they go down, however on average stocks have brought in about 9% per year over time. Some years have big gains and some years have big losses. The goal to continue to contribute during the good and the bad times. No one can “time” the market, so trying to figure out when to buy and when to sell is usually a loser’s game. Slow and steady wins the race when it comes to the stock market.

When you invest in a retirement account, you still have access to your money, so don’t think of the funds as being gone. There are early withdrawal penalties in place to encourage you not to take funds out, however by investing in a Roth 401k or IRA you can take out principal, not interest earned, at any time with no penalties and it’s usually as easy as making a phone call or mailing in a form.

Whichever way you choose to invest for your future, be sure to think about how much money the managing company is making from your account. Fool.com has a great article on expense ratios.

What do you want your life to look like at 60 years old? 65? 75? Investing now, means that you will have more options later.