I thought I would share an example from our 401K (which we never had till about 4 years ago when Art joined the company he works with).
Art's company places 3% of his annual income into his 401K automatically. They do this on a quarterly basis...so every 3 months they put in 3% of what he's made that quarter.
In addition, they will match 50% of the first 8% of his income that we put into the 401K. So - when we were putting 8% in (I'm thinking we should up it again as we cut back a bit ago)- they put in 4% of his pay...which meant that the really 15% of his pay was going into his 401K. I say 15% because the company automatically did 3%, we added 8% and then they added 4%.
With this company (I don't know about others) - we have several choices on how to manage that 401K. For the first 2 or maybe 3 years - we put about 70% in the aggressive funds which were more risky but had higher rates of return. About a year ago - we bumped that down to about 40% in the aggressive funds and when things happened a few weeks ago where some banks closed - we decided to put 90% in the "safe" fund with a guaranteed rate of like 3 or 4% and only leave 10% or less in the risky funds. It might have been 95%....because when the stock market dropped 500 points in one day (or something like that) - I decided to check our account and we'd dropped $38 on our investments in that one day....not bad when you consider we have over $15,000 in our 401K so far. (We took out a loan from it and are repaying the loan - otherwise we'd have about $25,000).
The bad thing (really a good thing) about a 401K is that it can be hard to take money from it while you're still young and working....you can move money around in it and you can transfer it from one company to another sometimes - but you have to have specific reasons for taking money out (like buying your first home, etc).
I think the stupidest thing we ever did was take a loan against the 401K....oh well....we're paying it off and will be paid off in a couple of years.
Every 401K is different in some respects based upon the company you work for and who they have managing the 401K funds. When I worked with one company a few years ago - you had like 5 choices for where to put your funds. You could only change your choices X times per year (I think - I'm not sure). Now - Art has like 10 choices or something (his company uses Mass Mutual).
I hope this helps in some way.
We here in the US also have something called a "Roth" which is another type of retirement fund. Art really wants us to get one for some very specific reasons that make a lot of sense - BUT - the problem is - right now with his company matching 50% of what we put in - its like making 50% interest - vs. putting it in the Roth and making less.
We want to get to the point financially where we can put the 8% in his company's 401K and then put an additional 5-10% in a Roth (or $2,000 or something - I don't have the figures close by).
And for those who are going to ask - here is the basic difference IF I understand correctly.
If I use a traditional 401K - my money is sheltered from taxes when I put it in. For instance - if Art makes $10,000 at work and puts $2,000 in his 401K - he'll pay taxes now on $8.000 and then later on - when he retires and is at a lower tax rate...he'll pay taxes on the money when he pulls it out of the 401K.
With a Roth...if he makes $10,000 and puts in $2,000 - he still pays taxes on the $10,000 now....but when he goes to pull the money out of the Roth...he pays no taxes - not even on the interest he's earned - because those dollars were already taxed once. So let's say he puts $2,000 in per year and it grows so that 10 years from now its not worth $20,000 but instead - $100,000. That $100,000 is considered "tax free" because we already paid taxes on the original $20,000.
Clear as mud?
:shock:
