Best Ways To Invest In Your 401K
Everyone wants to have a secure retirement. After working most of your adult life, your golden years are the time when you want to enjoy life and do the things that you have always wanted to do. Unfortunately, many people are not saving enough for their retirement. Social Security is no longer an income source to be relied upon because the funding source may be inadequate. Therefore, it is up to you to plan ahead to make sure that you can enjoy the rest of your years without financial worries. If you want to learn the best ways to save, read this article for some helpful suggestions.
If your employer offers a 401K plan to its employees, make sure that you take full advantage of it. Many companies require employees to have worked at the company for a certain period of time before qualifying them for the program. The beauty of the 401K plan is that you can deduct pre-tax dollars to fund your 401K, thus reducing your taxable income for the current year.
Also, many companies offer to match their employees’ contributions up to a certain percentage of income. The match is almost like a guaranteed return on your money. It is in your best interest to contribute at least to the percentage level of the company match so you can get the full benefit of the program. There is no easier way to invest. Once you inform your human resources department how much you would like to contribute to your 401K every month, the money will be deducted automatically to fund your account. You need not do anything else, except to look at your 401K balance every month if you so choose.
The types of investments available in your 401K program are probably broad in nature. Different types of investment vehicles carry different risks but offer different levels of potential returns. Stock funds are the riskiest because their performance is reliant on the performance of the equity market. They can fluctuate a lot in price. However, the potential returns are greater. Bond fund prices do not fluctuate as much, but the potential returns are slightly less than stocks. The money market fund carries the least risk because it is based on cash, but the potential returns are the lowest.
So, how do you decide how to allocate your money in these types of investment choices to maximize your return? The rule of thumb is the younger you are when you start your 401K, the more risk you can take because you have more time to recover from a slump. Historically, stocks have out-performed the other investment choices over the long-term. But is only if your money can stay in the fund for a long time to allow itself to grow. If you are only a few years away from retirement, you would allocate more money into cash or bonds because they are less volatile. Decrease your holdings in stock funds because if there is a slump, there may not be enough time for your stock fund to recover.
You should contact your human resources department for more information about your 401K plan. Do this right away, and you can start saving up for your golden years.