What the heck is a 401(k) and how do I know if I have one?
I’m gonna be straight up, I could not figure out a catchy intro to this piece, but every time I typed, “…and now you’re college educated, you graduated…” I kept going into this song and dance and getting completely distracted. Then, I’d put my writing on hold for another 5 minutes. Does that ever happen to you? Where you say a combination of words that reminds you of a song or a movie quote that takes you back to being in 7th grade or senior year in college, and now you’re calling your BFF talking about that one time that one guy you liked totally ignored you, and it was embarrassing as hell? Damnit! I did it again!
You’ve done it. You locked in that job of a lifetime, you finally got that big-time pay and those big-time benefits. But wait, let’s talk about those benefits. No, let’s talk about 401(k)s! (The least sexy thing I could have said, I know). There’s a lot to ‘em, and I’m going to help you get comfy with them in this little 4-part series. We’ll break them down, piece-by-piece so you can make sure you’re taking full advantage of their offerings, make sure they are right for you, and well, be a millionaire when you retire, capisce?*
*(cah-peesh, Uncle Jesse style)
So, what is a 401(k)?
It’s really just a term for a savings account, established by your workplace under your name, which allows you to save a portion of your paycheck before taxes are taken out of it. You know how your salary is a specified amount of money, let’s say $30,000, but really you make just shy of $25,000 after Uncle Sam gets done with it? Well, a 401(k) lets you put a percentage into savings before Uncle Sam comes a’whistlin—I, personally imagine him whistling. The money that gets swept into your 401(k) savings account can be allocated towards investments that reflect the risk allocation you need at your current life status. From there, that money will grow, tax-free, until you pull it out upon retirement.
But wait, how do I know if I have a retirement plan?
If you’re company doesn’t have an HR portal where you can check your benefits, then call up your HR department and ask. Write down the answers to these questions:
- How much is the employee match?
- What is the default contribution and allocation?
- Are there any known fees?
- Can I get more information on investment options? (or direction on how to use that fancy benefits portal)
- Can I set up automatic contributions? (the answer will be ‘yes’—for now, ask to contribute the 'match' unless you think that will really stretch you—more on this in Part Two)
Cool, I got one. So I’m good, right?
Here’s a bit about 401(k)’s and your retirement. Back in the day pension plans were the iPod minis—Actually, some are still around, about 10% of U.S. employers still offer them—If you have one, lucky duck! Because a pension is a retirement plan you don’t need to worry about as much. In short, the company you work for takes on all the risk. When you retire, that company guarantees to pay you an amount that will, in a sense, replace your monthly income until you die, no takebacksies.* Companies have since wised up, no thanks to the Great Recession, and risk has now shifted from the employer to the employee, that’s you.
*One caveat: Pension plans are truly most effective if you plan to stay at a company for 20-30 years. Given the short-term relationships our generation tends to prefer, pensions may not be the retirement solutions for us after all. Such disruptors we Millennials are.
You see, a 401(k) was not created to be the primary retirement solution. Only recently did we start intending them as a retirement plan. Now, since the money you save towards your 401(k) is in an account under your name, there is no guarantee that your retirement will replace your income when you do decide to grow old in Florida, as a pension once did. The risk is on you to make sure the account value is high enough so you may retire comfortably. We'll talk all about that in Part Two, get more of the deets on 401(k) advantages in Part Three, and really decipher if a 401(k) is right for you in Part Four, so stay tuned!