How To Set Up Your 401(k)

Congratulations! Not only have you landed a job, but you landed one with a sweet benefit: a 401(k). Formally defined as an “employee contribution plan”, 401(k)s were created as a way to encourage Americans to put aside money for retirement.

As soon as companies realized that offering 401(k)s (and even matching contributions for them) was much cheaper and less risky than offering a pension almost all of them got on board.

Start Your 401(k) As Soon As Possible

Not only is starting early crucial to retirement due to compounding interest, but many employers will offer some type of matching program meaning the longer you wait the more free money you are leaving on the table. Speak with your human resources department to learn more about your specific 401(k) plan as well as the process for opening your account.

How much should I contribute?

So you’ve opened your account. The next step is to decide how much of your paycheck to contribute. The simple answer would be “as much as you can” but in reality that may not be the best investment advice for everyone. There are a multitude of retirement products out there that fit different situations and goals, such as a Roth IRA or a permanent life insurance policy.

The definite answer is: contribute enough to get your full employer match, no exceptions. Anything less is leaving money on the table. My employer matches up to 6% so for the first few paychecks that is what I contributed to get a feel for my personal cash flow and see how much more I could easily contribute. Your goal should be to eventually get the total contribution number up to 20% of your salary. So using my example again if I get a 6% dollar for dollar match I should aim to contribute at least 14% of my paycheck to my 401(k) if possible.

I should just let the professionals do my investing for me right?

WRONG

When you set up your 401(k) plan almost every retirement planning company will offer you an actively managed account where a professional will watch your portfolio for you and redistribute your asset classes as they see fit. DO NOT CHOSE THIS OPTION. The fees you pay to have this done for you eat up your return year after year, and I promise, you can easily do this yourself.

You are now ready

You have now opened your 401(k), selected a contribution amount, and decided to manage your own money like a true millionaire. Pick a few mutual funds and you are good to go! Not sure which funds to pick? Check out my post “The Best Way To Invest Your 401(k).” Interested in other ways to prepare for retirement? Learn about Individual Retirement accounts (IRAs) with IRA Basics.

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Comment below with how much you contribute to your 401(k)!

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2 thoughts on “How To Set Up Your 401(k)”

  1. Hey George! I am curious why these plans are given the number designation that they are. Are there 400(k)s? Or 401(d)s? Solid advice though, these are super informative to read through.

    1. Hey Ben, great question. These plans are named 401(k) plans after the section of the tax code that they were created under. Specifically section 401(k) of the Internal Revenue Code.

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