Investment Planning Tips For Your Individual 401(K)

By Jennifer Gregory. May 7th 2016

Retirement may feel like it's a lifetime away, but starting to save for your future at the beginning of your career is one of the smartest financial moves that you can make. Every dollar that you put away for your retirement now will pay you back many times over when you retire.

The best place to start saving for retirement is through your workplace 401(k).

Here are four steps to help you get started saving for your future by opening your first 401(k):

Decide How Much To Invest

Many companies match employees' 401(k) contributions up to a defined percentage of their salary. Find out if your company has a matching contribution program and what the match limit is. “For plans with an employer matching contribution, you should contribute at least enough to get the entire employer match,” said John Olson, Financial Consultant for LPL Financial. “For example, if the plan matches 50 percent of the first 6 percent you contribute, then you should contribute at least 6 percent. If you don't, then you are leaving free money on the table.”

The match limit is the minimum you should contribute. Olson recommends that future retirees aim to contribute at least 10 percent of their overall pay to their 401(k). However, if you cannot start with that amount, contribute what you can and increase the amount as soon as possible.

Find Room In Your Budget To Invest

Since money can be tight when you enter the workforce, you may be wondering how you can afford to invest in your 401(k).

Go through your monthly budget and determine areas where you can cut back on spending. Each small sacrifice that you can make now will be well worth it for your financial future.

Each time you receive a raise or cost of living adjustment, increase your 401(k) contribution before you adjust your lifestyle to the higher salary. You should also set a higher contribution percentage for any bonus pay to also help increase the funds in your retirement account.

Choose A Roth 401(K) Or A Traditional 401(K)

If your employer offers both a Roth 401(k) and a traditional 401(k) program, determine which type of plan works best for your situation. One of the biggest differences between the two plans is that in a traditional 401(k), you contribute money pre-tax and pay taxes when you withdraw the money at retirement. In a Roth 401(k), your contributions are made after tax, but your withdrawals are tax-free.

“If you are just beginning employment, consider contributing to the Roth 401(k) if your employer offers this option,” said Olson. “You'll have to pay tax at some point, so it may be better to do this now to avoid paying higher taxes in the future."

Determine Your Risk Appetite

Your next choice will be which funds to invest in within your company's 401(k) plan. When you enroll, you will receive a list of different funds and options within the funds. While the common advice is to take more investment risk when you are young, it can be challenging to know how much risk is advisable and which risks are worth taking.

Ted Jenkin, Co-CEO and Founder of oXYGen Financial, recommends acting your age with your investing. “In general, you should have your current age represent the percentage of your money in bond type investments, and then subtract your age from 100 to see what percentage to put in stock type investments,” said Jenkin. For example, if you are 20 years old, put 20 percent of your investments in bonds and 80 percent in stocks. As you get older, be sure to adjust the balance between stocks and bonds to decrease the risk.

You may be tempted to simply select the default stocks and mutual funds for your plan, but consider doing your own research to find the best performing funds. Olson recommends gathering third party reviews of mutual funds by experts, such as Morningstar and Lipper, comparing their performance to other similar funds and using this information to make your selections.

After you have set up your 401(k) account, monitor your investments to make sure that they are performing well. Remember that these are long term investments so it is unwise to make adjustments based on normal market fluctuations.

When you retire many years from now, you will be very glad that you took the time and made the sacrifices to begin investing at a young age. The time spent researching options will help you to create a secure financial future for yourself and your family.


  • John Olson, Financial Consultant for LPL Financial; Interview conducted via email on Thursday, Jan. 5, 2012
  • Ted Jenkin, Co-CEO and Founder of oXYGen Financial; Interview conducted via email on Wednesday, Jan. 4, 2012
  • Wall Street Journal
  • Darwin’s Finance

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