Enrolling in your employer's 401K plan is the first step in building a comfortable retirement. Even if you only save a minimum amount of money and your income is low, the compounded interest will grow over the life of your 401K account.
Now that your account is opened and you are ready to invest, the question is how? The first thing to remember is that you will be managing your 401K. That means you must do your homework to determine which investments will meet your financial goals.
The first thing to determine is the amount of money that will automatically be deducted from your paycheck each month. The maximum contribution for 2010 is $16,500. If you are 50 years old or older and your employer offers a catch up contribution for your 401K, you can contribute $5,500 in 2010. The catch up must be done through automatic payroll deductions and they are not eligible for a matching contribution by your employer. In all likelihood your plan is available on-line in a secure environment and should list the mutual funds available for investment.
A mutual fund is an investment product that is made up of a pool of funds collected from many investors to invest in stocks, bonds and money market instruments. Mutual funds are operated by money managers who invest the fund's capital to produce capital gains and income for the fund's investors. One of the biggest advantages of mutual funds is that they give small investors access to portfolios of stocks, bonds and other securities.
Mutual funds are categorized by asset class. An asset class is a group of securities that have similar characteristics. These asset classes are: large company, small/mid cap, international/global, bonds, balanced and capital preservation.
A Large Company fund contains stocks of large publicly traded companies like Chevron, Home Depot and McDonald's. They are also known as large cap stocks or blue chip stocks. A small/mid company fund contains stocks of smaller publicly traded companies that have a greater degree of risk. They are also known as small-cap stocks. An International/Global fund invests in companies that are outside of the U.S. These funds may invest in one or many countries. Bond or income funds may concentrate investments in particular types of bonds or debt such as government bonds, municipal bonds, corporate bonds and convertible bonds or a combination of these. A Balanced fund buys a combination of common stock, preferred stock and bonds to provide income and capital appreciation to avoid risk. The purpose of balanced funds (also known as hybrid funds) is to provide investors with growth and income by investing in stocks (for growth) and bonds (for income). This insures these funds will handle stock market downturns without too much loss. Balanced funds will usually increase less than stock funds during an up market. Capital Preservation is designed to keep the principal (the initial amount of money you invested) safe with little or no fluctuation in value. Income is made from interest and dividends from certificates of deposit (CD's), money market instruments and U.S. treasury bills.
Your plan should provide all the necessary information related to the fund's performance, risk, rating and return. Choosing the right fund requires a lot of work but it will pay off in building a comfortable nest egg for retirement.
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