Recession is Over? Beef Up Your 401(k)
It sure has been easy to get financially unhinged over the last year. With doomsayers predicting financial Armageddon, you may have been inclined to stuff every extra buck in your mattress. Or, if you are managing to add to your bottom line, maybe you’ve been buying gold and hiding it in your mother’s basement, along with flashlights, bottled water, and cans of tuna.
Credit: klearchos
But this too will pass. In fact, economists are now saying the recession is over. Of course, all that means is that the economy has stopped contracting. It doesn’t mean more jobs are around the corner, and if you’re unemployed you’re probably still scrimping for coins to fill up your gas tank.
If you do have a job, though, don’t let the economic malaise undermine your long-term savings plan. Stock market downtowns are the best time to invest for the long haul. You’re buying into the market at lower prices (though, not as low as they were — the market has gone up 44% since March).
If you’re young and have some 40 years until retirement, the best thing you can do for yourself financially right now is to contribute to your 401(k), or your 403(b) if you work for a non-profit. If your employer offers one of these plans, it’s the simplest retirement savings vehicle available to you. You set it up for automatic withdrawals from your paycheck, so you never even miss the money. Usually you can contribute up to around 6% of you salary.
Aside from the automatic savings, there’s one nifty thing that makes a 401(k) a no brainer: They take the money out of your paycheck before it’s taxed and it grows tax-deferred until you start to withdraw the money in retirement.
What’s more, your employer might match a percentage of what you contribute to your 401(k). Typically, you might get 50 cents on the dollar up to 6% of your salary. Don’t let the recession keep you from collecting this free money!
So max out your 401(k). Put away as much as you can. Once you’ve got the account set up, make it easy on yourself. If you’re in your 20s and want to retire in your 60s, you might as well choose a broad, diversified stock fund, like a total market or S&P 500 index fund, which models the stock market’s returns.
Despite the recent future, over the long haul, stocks have been the best asset class for growing your money. And if they go down in the short-term, you don’t have to sweat it. You’re dollar-cost-averaging into the market, or putting the same amount of money into it with every pay check. So when prices go up, you buy less. When prices go down – it’s like a sale on Wall Street – you buy more automatically.
The beautiful thing about a 401(k) is that you can set it and forget it. As you get older and closer to retirement (decades from now), then you can worry about changing your asset allocation into safer vehicles to protect your money. But for now, take advantage of the recession and make good use of that 401(k).
Tags: 401k, recession | Categories: Investing, Saving |
HERO!
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