401(k) help!?

Question

I'm about to enroll in my company's 401(k) plan. They match 50% up to a 6% contribution. I would like to contribute 6%, but I'm about to have to start paying off my student loans, which will be quite a big payment, so I don't know if I can afford it.

But I guess my bigger question is how to allocate my investments, since I have no idea where to start. Here are my options:

The target date retirement funds (I probably won't go with this)

AmCent Strategic Allocation: Aggressive, Conservative, and Moderate (I may go with this b/c it would be simple to just put 100% into this single fund and not have to worry about splitting it all up into funds I don't know anything about)

Fixed Interest: AUL Fixed interest account

Cash: OneAmerica Money market

Short term govt bond: Vanguard short term federal

Large cap value: Fidelity VIP equity income

Large cap blend: SSgA S&P 500 flagship

Large cap growth: American Century Ulta, Fidelity VIP contrafund

(continued)

Answer 1

PUT 6% OF YOUR SALARY INTO YOUR 401(k)!  It will get you FREE MONEY automatically!  

Regarding your investment options, none of us have enough information to advise you.  Vanguard and T. Rowe Price are both great companies, but your needs are unique to you.  Look at the historical information about the funds offered, realize the economy is in a downturn, and plan accordingly.  Check your allocations at least every three months and make adjustments as needed.

Answer 2

I would be very aggressive at 23 potentially going into international funds and small caps with low expense ratios.  You really need to watch the expense ratios.  If you want to play conservative, I would probably go with an index fund.  At your age, it does not make sense to go with money markets or anything like that.

Answer 3

If you have to pay off your college loan, that should take priority in your income allocation.  Maybe scale back somewhat to begin with although that 50% is certainly attractive.  The AmCent Moderate would be a decent choice.  What it is is a mix of other AmCent funds to allocate your investments over a variety of Am Cent funds. You might wish to consider the Agressive however.  The main differences are the aggressive has 15% more equity allocation than the moderate which is commendable and a greater portion of growth type funds which might lead to problems in down markets which we are in at the moment.

Maybe start out this year with 4% and see how that works out and then if it does work out ok, bump it up next year.

Answer 4

firstly, if you can't afford living on only 94% of your income something is wrong - you REALLY need a budget!  Besides, the 6% that you would put in is (probably) pre-tax anyway, so your out of pocket expense is even lower!  I think the real question is can you afford NOT to do this?

but if you just want to play it fairly safe, then going with any of the large blend funds will get you a moderate rate of return, and shouldn't be too risky.

though at 23, you should really think twice about playing it safe.

there's nothing wrong with wanting a bit less volatility, but if you want to have enough money to retire nicely, you may have to accept a bit of risk in your portfolio.

the good news is that if you invest that 9% (the 6% you contribute and the 3% worth of match) of your income today, and let it sit for the next 45 years in a relatively safe large cap blend fund, and earn 10% per year, this years contribution to your 401(k) will be worth about $328,000 when you take it out (assuming you earn $50,000 today).

the bad news is that if you invested in risker asset classes, like small cap value and international funds, you could be earning 13-15% per year on average.  so what's the big deal about that extra 3% per year? well, with those same assumptions, but using just a 13% average return, this year's contributions would be worth about $1,100,000.

yea, it's called compounded interest.  so like i said, there's nothing wrong with playing it a bit safer (you still end up with 328k), taking a bit more risk might be in your best interests in the long run.

(oh, by the way, at 15%, this year's contribution would grow to more than $2.4 million!

but like i said, it's your choice.)

Answer 5

First of all, investingis for the "long haul". In

other words, this is money you should not expect to touch for at least 7 to 10 years from now. So if you cannot let this money work for you for this amount of time, do NOT start investing. Since you are only 23 years old, you have time working for you. The first thing you should do is assess your tolerance for risk, which you seem to have done already which you said is Moderate. But you should alocate your money at diffeent risk levels. When you invest your money in equal amounts over a period of time, you take advantage of what is know as dollar cost averaging. This is where your money will purchase more shares of stock as the price of stocks go down, and fewer shares of stock as the price of stock goes up. So what you paid $10 a share 7 years ago will probably be worth $18 a share today. Not knowing the specifics about the choices you have to invest in, at your age I would start by placing about 30% of your money in Income (low risk) stocks, 50% in stocks and bond funds (balanced or moderate) stocks, and 20% in aggressive (higher risk) stocks. As you get older (50+) you should start to decrease your risk. You will make less money, but you won't lose it because of risky investments. I hope this helps you out in your decision making.