If you work for an employer who offers a 401 K retirement plan, you should join it as soon as you’re eligible. Your employer will match your contributions up to 10%, which means you can double your contributions and grow your wealth faster. If you’re new to investing, the following guide can help you develop a strategy.
Pay Attention to Fees
Each fund charges maintenance fees, but every fund’s fees will be different. You’ll want to avoid funds with higher fees because that can eat into the wealth you accumulate. The fees are based on a percentage of your earnings, which means more money will be deducted as maintenance fees when you earn more wealth. For example, if you earn $227,000 and you’re charged a 1.5% rate, you’ll end up paying $64,000 in fees.
Know Your Risk Tolerance
In basic terms, risk tolerance is the amount of money you can afford to lose. If you’re in your 20s or early 30s, you have a higher risk tolerance because you have time to regrow the wealth you lost. If you’re older, you’ll have a lower risk tolerance. In that case, you should choose a more modest investing strategy that will allow you to save most of the wealth you have grown.
Choose Funds by Type
Each person will use their 401 K retirement plan differently, based on the investing strategy they have chosen. For example, a person with a lower risk tolerance will choose conservative funds that provide low risks and lower returns. A value fund offers a few high risk investments, but still sticks with modest and safe returns. A balanced fund has a greater number of high risk/high returns investments. This type of fund is better for younger investors who still need to grow their wealth.