We lay out our clothes for business trips, we make detailed menus for the week, we schedule doctor's appointments months ahead of time, but are we doing enough to plan for our futures? A 401K plan can provide financial stability after retirement, but what does that mystic number stand for anyway, and how do you know the money you invest is going to be safe?
We sat down with Paychex HR Generalist Mary Rankin to get to the bottom of the 401K so you can be at the top of your financial planning game. West Michigan Woman: What does 401K stand for anyway?
Mary Rankin: 401K is the internal revenue code that allows people to set aside funds, pre-tax, out of their paycheck. 401K is simply the code.
WMW: Who can have a 401K plan?
MR: A majority of employers in the United States provide 401K plans. Check with your employer to see if they offer a 401K plan.
WMW: Why should someone get a 401K plan?
MR: The average life expectancy so much older now. People will live twenty years after retirement, and that's a long time. You need to be able to replace your current income to maintain your standard of living.
WMW: When should you start putting money into a 401K plan?
MR: Age is on your side. The sooner you start (investing), with compounded interested, the more you'll make.
WMW: Once I decide to invest my money in a 401K plan, where does it go?
MR: There are different funds in which you can invest your money like bond funds, equity funds, and money market funds. Ask your employer for a summary plan description–this will give you percentages of average annual total return. The younger you are, the higher risk you can take, and you can be more aggressive, because you have longer to recuperate your money. When taking a long-term planning approach, you can't be too worried about market fluctuations.
WMW: Can I change my distribution options after I invest my money?
MR: You can move past contributions by reallocating funds. It is recommended by financial advisors that you look at your contribution distribution every year.
WMW: What is an employer match?
MR: For example, if you invest 1 percent of your paycheck per pay period, your employer will match that amount by investing the same amount into your 401K plan up to a certain percent. Companies do this to encourage you to save for your retirement. If you don't participate in the plan, it's like leaving money on the table.
WMW: How do I get my 401K money back? Can I get it any time, or do I have to wait?
MR: If you take your money before you turn 59 1/2 years old, you'll pay taxes on it, plus a 10 percent penalty. It is considered a long-term investment.
WMW: Where do I go if I have more questions about investing in a 401K plan?
MR: Consult a financial advisor that is series seven licensed. Fidelity has advisors, and sometimes they will come to your house to talk about your retirement plan. You can also use their online tool and enter your age, your lifestyle, and how you feel about the market.
Written by: Erika Fifelski was born and raised in West Michigan, and after a brief stint on the sunrise side, she's home and loving it. Erika enjoys cooking, sewing, vacuuming, and discovering new ways to live sustainably and support local businesses.