401k

Recently, I heard the Rich Man, Poor Man guy talk about 401k plans being a trap for the middle class. He talked about it as just being prepared to pay taxes in the future on what you save now.

I dunno... I mean I understand what he meant. He doesn't like to pay taxes and that is understandable. Also, he is an advocate of the entrepreneurial way and that's fine too.

But, what if you don't want to be an entrepreneur? And, what if you are happy in your work and your employer offers a 401k type plan? Well, I gotta say, that you really must participate and contribute at least up to the percentage that your employer matches.

Looking at it like this... No where else, can you instantly double your money. And that's an awfully nice feeling. To know that every paycheck you can turn $50 into $100 instantly. And in retirement, you'll be able to look back and smile.

Looking at it like this... If you are worried about down turns in the market, well, the market has to go down 50% before you start losing "your" contributions. While that's a terrible bearishly pessimistic view, if that's what you need to bring things into focus... go ahead and use it.

Another way of looking at it... Deferring income can save taxes now and some people may qualify for tax credits. (See Federal Form 8880) But, let me make this clear, I am not offering tax advice.

Risk Tolerance: As far as what you invest in, well, that has a lot to do with your time horizon. A younger person can assume more risk. An older person may need to mix in more bonds or perhaps, mostly bonds. I can't determine this for you. After all, I don't have a license. hehe... But hopefully, I can enlighten you a bit and if you need help you'll be able to understand what a professional tells you when you seek their advice.

One way to determine risk tolerance is this... With the investments you hold can you sleep at night? If you can't sleep then you might need to re-evaluate your holdings or get more educated to make sure you understand what you hold.

I can say this... Get Diversified. And if you own a lot of your employers stock, sell some, if at all possible. I'm not saying you have to sell it all but having a large percentage of your wealth tied to one investment can be dangerous i.e. ENRON. So diversify.

To sum up 401k investing... Always take full advantage of the employer match, determine your Risk Tolerance and Be Diversified accordingly.

Now, I know, it isn't always that easy to save some money back but if you can do anything at all do it. And if you get a raise in pay, a bonus or some kind of cash award go ahead and put that towards your future. The time to save for the future is now. Wait... and it will be too late.

The next step: After taking full advantage of the employer match, you might want to consider a Roth IRA.

The experts say, that you should also have an emergency fund. That you should save up an amount equal to your expenses for a certain period of time... 3 months, 6 months. I have to admit that I don't have a fully funded emergency savings account. I've found it pretty hard to do so, but slowly I am getting there. Just keep taking steps to improve your position. Some day, we'll get there. *smile*

Personally, I do take full advantage of my employers match and I have a Roth that I contribute to as well.

But perhaps, the Roth is something for another post.

Happy Investing.