calculators to help you decide. One such tool can be found at the Website of the mutual fund and 401(k) advisory company T. Rowe Price, at www.t roweprice.com. Once at the site, click on “Retirement Investing.”
My advice: borrowing from your 401(k) is a bad idea unless you are in severe financial difficulty.
I’m only in my twenties. Why is it so important that I start saving for retirement now?
Today, about 25% of employees working for companies that offer 401(k)s don’t use them. This is like turning down free money, and presents a worrisome public policy issue. Indeed, the number of workers who say they are saving for retirement dropped in 2001 after years of steady growth. The annual Retirement Confidence Survey released in May 2001 by EBRI, the American Savings Education Council, and Matthew Greenwald & Associates showed that the number of people saving for retirement declined from 75%
in 2000 to 71% in 2001. Moreover, there is growing evidence that many Americans are willing to drain their already-inadequate retirement reserves. This is sheer folly and reveals a lack of understanding of the power of saving regularly from an early age.
The beauty of a 401(k) comes down to two things: compound interest and dollar-cost averaging. These are easy concepts to understand. Compounding simply means that the returns you earn today get plowed back into your 401(k) so that you make returns on your returns.
The other great attraction of 401(k)s is that they force you to do what is known as dollar-cost averaging. This happens when you invest a fixed amount of money at regular intervals. By contributing, say, $100 a month every month, you will be buying more shares in a fund when the share price is low, and fewer shares when the price is high. Any drop in price lets you buy more shares with the same amount of money. When share prices go back up, you’ll benefit again because you will have more shares. Most investment advisers agree that dollar-cost averaging is the best way to invest.
How do I know my savings will be safe?
In 1974 Congress passed a law called the Employee Retirement Income Security Act, or ERISA. The law sets standards for pension plans, including 401(k)s. Who is eligible for a plan, minimum performance standards, rules on vesting, how investments must be selected, and how plans are funded are all spelled out in ERISA. The law, administered by the Department of Labor, is there to protect your retirement income from abuse or misuse. For example, it says that your money must be deposited into a custodial account, which walls it off in case your employer goes bankrupt or is sold. The IRS also requires your employer to send you regular account statements (usually once a quarter) explaining how your investments performed, as well as educational materials about the investment choices available to you.
10 Warning Signs That Your Funds Are In Danger
- Your 401(k) or individual account statement is consistently late or comes at irregular intervals
- Your account balance does