Starting Your 401(k) at a New Job

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I was on the phone a few days ago with a friend who just started a new job at a big computer company.  This friend is a smart girl.  She has a college degree.  She knows she should be investing for retirement.  In our conversation, it came out that she has not set up her 401(k) yet at her new employer.  She has been there for a month!  On top of that, the employer gives a 5% match for just setting it up.  Like most people in their early 20s, my friend was making a mistake.  If you are like she was last week, here is what you need to do to get started.

  1. Read your employer 401(k) information.  Almost any salary (non-hourly) job has some sort of 401(k) sponsored by the employer.  Most big companies, and many small ones, will offer an automatic investment option where the money is taken directly from your paycheck.  Learn all you can about your setup and what you need to do.
  2. Go to the website or find the form you need to get started.  Most of these forms ask for simply information like an employee ID number and, sometimes, a social security number.
  3. Calculate your investment amount.  If your employer offers a match, it is free money!  Take full advantage.  If you can get a 100% match up to 3%, put at least 3%.  If you can get 100% match up to 5%, put at least 5%.  Do not pass up free money, that would be stupid.
  4. Pick your fund.  This is the part where most people in their 20s give up.  They think it is too complicated.  Well, have no fear, I am here to help.  Look through your fund options.  Some employers have 2 or 3, some have 20 or 30.  Almost all have a diversified mutual fund with a target retirement date.  My employer calls them “destination funds” while some call them “life-cycle funds.”  These are automatically allocated to a risk profile for people your age.  I am in the “destination 2050” fund for my 401(k).
  5. Forget about it.  Increase your contribution if you can over time.

The beauty of most 401(k) plans is that you do not have to think about it.  You can set it up and forget about it.  Over time, I have increased my contribution from 3% (to get my whole employer match) to about 7% today.  Including 401k, Roth, stock purchase plan, and my Schwab investment account, I am now saving or investing about 15% of my paycheck.  Over time, I want to increase it even more.

Don't be intimidated by the sign up process.  Giving up free money is stupid.  You are not stupid.  If you were, you would not be here.  If you are already investing, look at increasing your percentage.  If you are not, what are you waiting for?  Start today!

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