Millennial participation in 401(k) plans is increasing rapidly and many young people are making the decision to save and invest for their futures. While the 401(k) can feel intimidating and there are many decisions to make, arguably the most important one is simply getting started early!
How Much to Save:
When you enroll in your 401(k), you will have to choose what percentage of your paycheck you would like to contribute each pay period. Most plans will let you start as low as 1% and some will even allow you to set up an automatic increase each year. A good goal for your contribution rate is 10% and it is always advantageous to at least contribute the amount that your company matches.
What is a Match?
Many employers will match a certain percentage of the employee’s contributions to the retirement plan. For example, if you make $100,000 per year and your employer matches 3% of your pay and you choose to contribute 5% of your pay then you will add $5,000 to your plan and the employer will put an additional $3,000 into the plan for you!
What to Invest In:
Most plans will have many investment options and can be overwhelming at first glance! The simple solution is to invest in a Target Date fund that actively manages your investments based on the age you expect to retire. If you like to take a more hands on approach, you can choose other investments within the plan and diversify however you choose.
Historically, stocks have provided greater returns than bonds but have also had more volatility along the way. Younger investors have a greater capacity to take risk and invest in stocks since they have a longer time horizon. However, taking risk is not for everyone and some millennial investors may feel more comfortable in a conservative portfolio.
Many 401(k) plans now feature the option to save pre-tax or Roth. The pre-tax option will allow you to defer the tax on any money added to your 401(k) until it is withdrawn, while the Roth option will allow you to pay tax today and let the contributions grow tax free. In general the Roth option is better for young investors but there are situations where pre-tax can make more sense.