into a jar, adding to it and letting it grow slowly. A 401(k), or other workplace retirement plan, is a step beyond that. It’s more like a garden than a jar. Once you understand the basics of your 401(k), it becomes easier to feel confident in your decisions.
In a jar, your money only grows when you add more. In a garden, what you plant can begin to grow on its own. Your investments can earn returns, and those returns may in turn earn additional returns. That’s called compounding, and it can have a meaningful impact over time. Like a garden, however, growth is not guaranteed. Markets can rise and fall, and investments can lose value.
Most workplace retirement plan contributions are made with pretax dollars, which lowers today’s taxable income; you’ll pay taxes when you withdraw it in retirement. Some plans also offer a Roth option: you contribute after-tax dollars and withdrawals in retirement can be tax free. Your plan administrator can provide more information.
Many 401(k) plans include an employer match, either up to a set dollar amount, perhaps $500, or a percentage of your salary, typically 3%–5%. Contributions you make, as well as those from your employer, can grow over time. Try to contribute at least enough to capture the full match; anything less means you’re leaving money on the table.
Now the question is how to invest your contributions inside your 401(k). The menu of investment options may seem complicated, but most fall into a few common categories.
• Stock or equity funds focus on stocks, which represent ownership in companies. Because they’re tied to company performance, they have the potential for higher growth over time, but their value can go up and down in the short term. When you’re decades from retirement, that short-term volatility matters less; you have time to ride out the swings.
• Bond funds invest in loans made to governments or corporations. These tend to be more stable than stock funds but typically grow more slowly. They can help balance the ups and downs.
• Balanced or blended funds hold a mix of stocks and bonds in a single investment.
• Target-date funds combine different types of investments in one fund. As you move toward a specified retirement year, the fund gradually adjusts to focus more on stability and less on growth.
The earlier you start planting, the more time your money has to grow. Even small contributions early in your career can end up as large amounts later, simply because they had more time to compound.
If you change jobs, keep in mind that your employer’s contributions may not be fully yours immediately. It depends on your plan’s vesting schedule, so it’s worth checking before you go.
The most important steps in a retirement plan are getting started, contributing consistently and taking advantage of what your plan offers. With a little knowledge, you can feel more confident moving forward. The garden is yours. Start planting.
This content was provided by Edward Jones for use by Seth R Minter, your Edward Jones financial advisor at 325 S Candy Ln, Macomb, IL 61455. Member SIPC
