The basics of 401(k) Plans

The basics of 401k Plans

You must have heard of 401(k) Plans right? Not clear what exactly it is and how well it works? Here’s a brief explanation of the features of the plan along with its functions.

What is the working procedure of a 401(k) Plan?

In a very simple language a 401(k) plan is a retirement plan setup and managed by your employer. You get to choose from a selection of investment funds based on risk that you would like to invest in. It is at your discretion to choose the specific investment fund you would like to invest in. You then indicate what percentage of your paycheck you would like to contribute to your plan each paycheck.

Once this amount has been decided by you, it will directly get deducted from your paycheck but without being taxed for it at that moment. There is a specific limit up to which you can contribute to your account. Some employers offer a matching program where they will match dollar for dollar of 50 cents on the dollar for each amount you set aside up to a certain limit – say, 3-6%. This is free money you should take advantage of.

When do you go for a 401(k) Plan?

It is never too late to start investing in your company’s 401k plan. The sooner the better. The sooner you start, the more you will have available to draw from when you retire.

What to invest in your 401k?

This is always a tricky issue because you are ultimately responsible for what you invest in and if a company or financial adviser or friend gives you advice and the returns are not to your liking, they do not want to be liable in this sue-happy society.

The general idea is that you should invest in the riskier investments the longer you have until you retire. More risk = more reward over the long term and since you would have several years to weather the ups and downs of the market you could go for the riskier options. If you have a few years until you retire, you would want to stick with more conservative funds to preserve your investments.

Consult your financial adviser for specific advice. You can also check out sites like for more advice.

Are you ready to retire? Tips for preparing for retirement

Are you ready to retire? Use these tips as a guideline to prepare for your retirement.

It is never too early to start thinking and preparing for retirement. Here are some items to consider about this very important time in your life.

• Review your finances. Knowing where you stand will help you focus on where you are headed. If you are in debt up to your elbows, then obviously you are not prepared to retire. Right now, set a personal budget and include some amount for retirement. To keep the same standard of living after retirement, then you will need between 70% and 90% of your current income.

• Review your current needs and goals. Knowing what you plan to do can give you some idea of what you will need in terms of money and health. So whether you plan to travel or stay home with the grandkids, start planning now.

• Develop a healthy lifestyle. This is the perfect time to quit smoking and start exercising. Losing a few pounds can help many aging folks stay healthier and keep fitter.

• Talk to your employer about your retirement plan now. Check to see what you can contribute and if your employer provides matching funds.

• Discuss various retirement possibilities with your spouse. Understand each other’s plans and make sure that you have all appropriate legal papers signed.

• Review your benefits and social security statement. If you have any questions, call to have them explained now instead of later.

• Open an IRA. You can check with your bank to see if you are eligible to open an IRA and get help you with the process.

• Think of how you want to spend your time. After retirement, you may want to take another job, volunteer, travel, or hobby.

These tips on getting prepared won’t guarantee that you’ll be ready for retirement, but give you some suggestions on making it easier. Many great successes in life found their true calling after age 60! Retirement could indeed be one of the best and most productive phases of your life.