A 401(k) is one type of retirement plan some companies establish for their employees. If your company has one, you can open an account and make contributions directly from your paycheck. Sometimes employers make a matching contribution to your account -- it’s like getting free money. If you find that a 401(k) is right for you, here are some Dos and Don’ts:
- DO sign up for automatic contribution options so everything is on autopilot. If your company has “automatic escalation” or “rebalancing options” sign up for those, too.
- DO pick your own “asset allocation;” don’t live with the fund’s default setting. Keep the investment in your own company’s stock to no more than 10% (you could have the best employer ever, but sorry, that’s what the Enron folks thought, too).
- DO beware of 401(k) fees. “Expense ratios” can range from 0.25% to 2%, and if you let them get out of control, they will eat into your nest egg.
- DON’T cash out your 401(k). Yes, it’s your money, but you can’t take it out before age 59½ without a nasty penalty. The penalty, along with missing out on the joy of compounding interest (yes, my most favorite joy, but I’m a nerd), can really undermine your retirement power if you decide on cashing out early.
- DON’T be tempted to contribute less to your 401(k) in favor of shiny short-term objects. You want to build a deck or remodel the bathroom? Start a savings subaccount. Don’t sacrifice 401(k) contributions. Putting short-term gain first will bite you in the butt because you’re not benefiting from the growth you would have seen from your investments. The longer you’re out, the harder the bite.
- DON’T borrow from your 401(k) unless you really need to, because when you pay it back, you will be using money that was already taxed. Then, when you take it out to use for retirement, you will be taxed again. No one wants to be double-taxed.
Find out if you’re saving enough for retirement.
Excerpted from: RICH BITCH, by Nicole Lapin. Copyright © 2015 Nicole Lapin. Rich Bitch is a trademark used under license from Nothing but Gold Productions. Inc. Published by Harlequin. Reprinted with permission.