A New and Improved 401(k)

Starting next month, I will be undergoing some structural changes to the method in which I am compensated at work.  On the surface, it seems like it will be a good thing, but only time will tell whether or not that impression is correct.  One of the major changes is the retirement package that is being offered.

Now Getting a Match

It turns out that I will now be getting a match from my employer.  Previously, that wasn’t the case and anything that I put into my 401(k) came out of my own pre-tax earnings.  I still contributed the maximum and have for the past decade, but now my savings will be growing faster.

401(k) Basics

I am sure that most of you know what a 401(k) is, but for those who don’t, let me take just a few minutes to go over some of the basics.

The 401(k) developed as an alternative retirement savings vehicle to the traditional defined pension plan offered by companies prior to the 1980’s.  It gets its name from the section of IRS Code that defines this particular type of retirement plan.  It is employer-related, as opposed to an IRA or a SIPP pension in the UK.

Each employee younger than 50 can contribute up to $16,500 into the account which is invested according to the employee’s wishes within the constructs of that particular plan.  Most plans offer a mix of stock and bond mutual funds and a money market fund as well.  Each employee 50 years of age and older can contribute an additional $5,500 in a catch-up provision.  (I guess this assumes that most people won’t have saved enough and need to make up for lost time.)

Essentially, this shifted the burden of retirement savings from the employer in the form of a pension plan onto the employee using earnings in the form of the 401(k).  It really doesn’t sound like this has been a good thing since most American employees have not saved enough for retirement.

Pay Yourself First

One of the best ways to save money is to pay yourself first and make it automatic.  Yesterday, I turned in the paper work to have the maximum taken out of each paycheck before I even see it.  That way, it is impossible for me to miss it.  I won’t even be planning on it in my spending.

Even though I really suck at budgeting and don’t like it, I am really good at paying myself first and planning for the future.  I will not be falling into that trap of not having enough for retirement.  I have contributed the maximum for the last 10 years and will be doing the same with this new arrangement.  Plus, now I will be getting a match to boot.  Free money and a guaranteed return will help that account grow that much faster.

My Fund Elections

The investment selections are a little different than what I have been used to, so I had to pick some new mutual funds.  I considered my other holdings in real estate and my other retirement accounts and decided to add 20% to the PIMCO total return bond fund.  I know that bonds are nearing the top since yields can’t get much lower, but Bill Gross is a smart guy and will know what to do.  Plus I am not getting any younger and don’t have any fixed income in my portfolio.

I also decided to put 40% into a EurAsia fund since I don’t feel I have enough foreign market exposure.  I am currently invested in individual U.S. stocks.  Even though I am not getting any younger, I am still looking at almost 28 years before I have to start withdrawing.  Since Asia is increasing wealth by a rapid clip, I want to benefit from that type of growth.  There will be some hiccups along the way, but dollar cost averaging will help.

The last 40% was placed into a small company growth fund.  Small companies tend to outperform their larger brethren.  Small companies can get big and bought out which helps to more than balance out those that fail.  Again, a longer investment horizon and dollar cost averaging should benefit me.

So, there you have it!  My new and improved (due to a match) 401(k)!

Readers:  Do you have a 401(k)?  Are you contributing the max?  Do you get a match?  Will you have enough for retirement?  What do you think of my elections?  Please feel free to comment.  I will probably match your comments.

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