Getting your first job can be both exciting and scary, especially when dealing with the onboarding paperwork associated with those big financial decisions. This is a watershed moment that most young workers will recognize: According a survey from Fisher Investments, 80% of millennials want to work for companies that offers a 401(k) — yet, only 25% of those working at companies with >200 employees actually enroll in their retirement savings program.
Why? Though the process seems fairly straightforward, it can get complicated quickly if you don’t understand how the various contributions, penalties, and investments fit together. Let’s take a deeper dive into the 5 most frequently asked questions when faced with your first 401(k) plan and give you the answers you need to start planning for your future today.
1. What is a 401(k)?
In its most basic definition, a 401(k) is a type of Individual retirement account (IRA) into which you contribute money each month. This money can be invested on your behalf into various funds (more on that later) and is left to accrue tax-free until you retire — at which point you will hopefully have a nice nest egg ready to fund the rest of your life.
2. What is my company’s match?
When you’re choosing the amount you want to contribute to your retirement account, it’s critical to know if your company offers a match. Let’s say you make $50,000 per year. If your company offers a match of 5%, they’re willing to contribute up to $2,500 per year into your 401(k) — but only if you contribute that much, too. If you choose to only contribute 2.5% (or $1,250), you’re giving up an extra $1,250 your company was willing to give you for free.
3. What is vesting?
Some companies offer generous matches that are saddled with “vesting” timelines. This means that they could offer a 10% match, but in graded increments based on how long you’ve been with the company. This can affect the amount shown in your 401(k) balance statement; if you’re not fully vested (meaning, if you haven’t been at the company long enough to earn the full amount of their contribution), your account may show more than you actually have.
4. Can the account be moved?
Yes — and this is a critical step in changing jobs. When you end your employment with Company A, you need to take the money from your 401(k) account with them and either move it over to your next employer’s 401(k) account or cash it out with tax penalties. You can also set up a personal IRA (like with Common Trust Federal Credit Union) to house your retirement funds so you don’t have to move them after every job.
5. How should I invest my funds?
A large — and risky — part of the 401(k) account is choosing to invest your saved retirement money. Here are the most common options:
- Stock funds: Choose the stocks in which you can invest a percentage of your 401(k).
- Target-date funds: Simply pick your target date for retirement, then pick the matching fund. There’s little maintenance, as the fund adjusts your asset allocation over time.
- Blended-fund investments: Choose a set ratio of stocks and bonds appropriate for your situation and risk assessment.
- Bonds/managed income: These can safeguard your money, but it won’t grow much.
- Money market funds: There’s zero growth, as these funds barely keep up with inflation.
The choice is yours and can be adjusted over the life of your retirement account, based on your situation.
When you transition from one life stage to another — be it graduation or retirement — it’s a scary move no matter your age. You face new financial decisions, but you just aren’t sure how to make the right choices for your future now that you’re the one in charge of it. What you need is a crash course in financial education designed to help you choose the path using sound information and advice.
Common Trust Federal Credit Union understands your concerns and offers our Financial Education Center to help you best understand and prepare for new life milestones. Get started today!