The 401(k) Decoded for Graduating College Students

As a college senior, you have no doubt heard about the 401(k) retirement savings plan, but how much of it have you actually processed? Have you written it off because you believe you don’t have to worry about it right now? In actuality, time will pass and retirement will be here before you know it, so the sooner you start contributing to your 401(k) plan the better off you will be.

What is a 401(k)?

A 401(k) is a retirement savings plan sponsored by an employer – a portion of the paycheck is invested in the account before taxes are taken out and these taxes aren’t paid until the money is withdrawn out of the account. You can control how your money is invested through a spread of mutual funds that include stocks, bonds, and money market investments, but most graduates with little to no investment experience shouldn’t fret since the employer will usually hire an administrator to oversee your account.

When transitioning into a career from college, it is important to empower yourself with this knowledge so that you can get a head start on financial management.

Starting Sooner Than Later

A good reason for starting sooner rather than later in investing is due to the time value of money – money available in the present time is worth more than the same amount in the future due to its potential earning capacity (the wonder of compounding); if you start investing now, you will have more money to retire on and not have to deal with the stress that arises when you find out funds are low.

Many employers offer matching on contribution up to a certain percentage – the most popular being around 3% of the employee’s salary. For example, say you earn $50,000 and you put $1,500 into your 401(k), your employer will match that $1,500 since it is 3% of your salary. You can add more to the 401(k) but the company won’t match beyond 3%.

How Much Do I Invest?

How much should you invest in the 401(k)? There is no easy answer to this and ultimately it depends on your choice, but I would recommend investing at the very least the amount it takes to get the full matching amount that the company pays to match your contributions. Through this method, you won’t leave money on the table and you won’t overly strain your wallet.

For recent college graduates, there are some tips to make investing much easier to understand and easier to put into motion. It is recommended that employees choose to have funds automatically deducted from their paycheck (which has recently become a standard option) since it deters the tendency to manually move it and then in the process, spend it elsewhere. It also necessary for new enrollees in the 401(k) to be aware of fees that arise on which employers are required to provide detailed information about –these fees are usually standard ones that come about through any investment plan.

The most important thing I can recommend is to consult outside sources on investment decisions. I certainly will when the time comes. As a recent college graduate, you might think you know everything but the reality is that you don’t; others have more wisdom through years of experience and they can advise you on how best to allocate your investments and the risk.

Remember, your goal is to invest enough money and earn enough on it so that you use it to retire comfortably!

So now that the 401(k) plan has been demystified, be sure to take advantage of it as you start your career. The sooner you begin investing, the better off you will be in the long-run!