Hi everyone, I recently landed a new job where the base 401(k) contribution for all FTEs is 12% of your salary. This is regardless of your contribution, with no additional match. I realize that this is unusual for most people and it is for me as well. In my last job, I got up to a 6% match so I maxed that out and didn’t think on it any further.
I currently contribute an additional 5% on top of the 12% that my employer provides, but got chatting with a coworker who mentioned that they were advised to take that money and, since it was not being matched, put it into the stock market instead. I’m open to learning, but have very little knowledge of stocks, cryptocurrency, or likely any other potential option you may suggest.
For a little extra information, I am in my mid-twenties, earn mid-five-figures/year, have little saved for retirement right now, and am open to any suggestions you may have.
So, what would you do in my situation? Thanks for any replies!
If you’re not particularly financially savvy, you should always put 10% into retirement in some sort of cheap index or target date fund.
Definitely do not fuck with individual stocks or god forbid, crypto, unless you are sure you know what you’re doing and prepared to lose 100% of your investment.
General retirement advice is to contribute 15% total to your retirement account. Since your employer adds 12%, you should contribute a minimum of 3%.
As for your coworkers advice, it may or may not be valid. Contributing to your 401k or a taxable account, both allow you to invest your money. The 401k comes along with tax advantages. Assuming you are making Traditional contributions, then you are saving taxes at the marginal tax bracket (potentially 22 or 24%). If you contribute enough to drop your MAGI to the 12% bracket, then the tax benefit is much less. You can still contribute to Roth, which means you can withdraw that money tax free in the future but you have to pay taxes on it now.
Another thing to consider is the fees in your 401k. Since you are limited to the options provided, sometimes fees are quite high. If you don’t have any options that cost less than 1%, you likely are better off investing your money elsewhere.
Finally, you get into the really personal part of personal finance. What are your goals? Do you have short/medium term goals that you would prefer to save this money for? For instance, if you want to save up for a down payment for a house in the future, putting that money in a 401k is a bad choice. Do you have a comfortable emergency fund to pay for unexpected expenses? Do you have high interest debt to pay off?
A good resource is this flowchart from r/personal finance: https://imgur.com/u0ocDRI
if it’s too good to be true, it’s probably not
12% even if you don’t put any in should set off alarm bells.
Like, who is managing that 401k? Is it related to someone running your company?
How’s the salary compared to similar jobs? Are you making 15% less and that’s where it’s coming from?
What is mid 5 digits? 50k? That means you’d be making 56k if you got it all in pay.
It’s not a bad wage, but something crazy like 12% 401k no matter what is usually for stuff at least twice your salary for tax evasion reasons.
I get not wanting to put details online, but you should find a coworker who’s been there a long time and ask about what’s going on. If no one’s been there more than a few years, that’s another huge red flag
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The big advantage of putting your additional contributions into the 401(k) is that it reduces your taxable income. The big disadvantage is that the money is locked away for decades; that cash is no longer available to make big purchases like a car, honeymoon trip, etc. There are some exceptions, but be careful that you don’t get hit with penalties.
Personally, if I were in your situation, I would open a no-fee brokerage account and put you additional retirement money into an index fund that tracks the S&P 500 or NASDAQ. If you need the money before you turn 66 then it will be readily available.
Better yet, put it in a Roth. OP can still withdraw the principal penalty-free if they need it, meanwhile it grows tax free.
If there’s an option for the company contributions to be Roth I’d make sure to do that. Roth is a “suffer now, collect later” type of thing. You pay taxes now, and NOT during retirement (good because you’re young, likely in a lower tax bracket than you’ll be in during retirement, etc.). Even the earnings are tax free in retirement.
Anything extra you put in should also be Roth. There are IRS maximums for personal contributions, and a higher maximum for combined personal/company contributions. At your salary you likely will not encounter these maximums unless you are saving $1,875/month (which would make you hit the maximum in December) in addition to company contributions.
To 401k or not to 401k – I say 401k. With Roth you pay now, not later. With traditional you don’t pay now, but pay later. Outside of 401k you pay taxes now AND later (on the earnings).
