March 17, 2015
Saving money in a retirement plan at work is smart. Why? What types of investments would be wise within the plan?
Saving money in a retirement plan at work is smart. Why? What types of investments would be wise within the plan?
Often companies will match money that you put into a 401K, 403B or other retirement plan at work. This is free money. If you don’t put it into a savings account at work you don’t get the money. If you do put money in your work retirement plan you should generally put it in index funds such as the S&P 500 index fund, Mid cap stock index funds or international index funds. All these funds are not actively managed. They just track indices. You should also consider REITS and Bonds to diversify your portfolio eventually. A target date fund can also be an ok investment if you do not want to actively rebalance each year. A target date fund will have a bit higher expense ratio than the index funds since it’s actively managed. In all things you should also keep an eye on the expense ratio. If you are investing in index funds the expense ratio should automatically be lower, but you should double check to be sure.
Summary:
1. Your work could match money. If you don’t put that in you don’t get the money.
2. Invest in index funds which should have low expense ratios.
Saving money in a retirement plan at work is smart if your employer will match a certain percentage of your contributions and/or if it provides you with exceptional investment options. If your employer will match part of your contributions, they are essentially giving you free money to invest in your future so you should not pass that up. When looking at the types of investments to put your retirement money in, pick the options that will provide you with the most diversification and the lowest expense ratios.
Saving money in a retirement plan at work can be a good choice for you because its and easy way to save. Money comes out of your pay check every month and is set aside for retirement. You can also get some tax benefits from it. Many employers match some of the money you put in which is free money in a sense. You should match the investments in the retirement plan at work with your other investments in your portfolio as a whole. Pay close attention to the costs of the investments in the retirement plans you have to chose from and go with one of the cheapest yearly cost plans.
You three covered the issue very well. The only thing I would add is the tax deferral benefit. When you save and invest in your traditional retirement plan at work, you are reducing your yearly federal and state income tax and deferring for many years as it builds in a tax sheltered account. Winner, winner, chicken dinner!