Most nights I make it a point to watch Jim Cramer’s Mad Money on CNBC. It is just one of the ways that I manage my financial future. At my first job I invested in that company’s 401k plan more than the minimum employee matching amount. I thought I was doing fine. The employer matching is the easiest free money you will ever make. That is the biggest positive that 401ks have. But the minimum is not enough. With that, simply increasing your contribution amount is not enough either. Yes you should be saving as much as you can for retirement, but the 401k is not the only vessel you need.
The first thing you need to do is open up a Roth IRA or Traditional IRA. Here is the hard part. Only contribute the minimum about to your 401k to apply for the maximum about of your employer matching. Then take the difference and put that into your IRA account. The scary part of this is now you are in charge of your retirement funds. The great news is that you are free to invest anywhere you want in the market and will be paying less fees that you would with your 401k. Yes, you probably don’t notice, but your 401k has fees associated with it. Most don’t notice these fees because when you get your quarterly report from your 401k, they report your total gains or losses including their fees.
Finally, sign up for a high interest savings account, such as ING, to keep the bulk of your savings. There is no reason to gain a fraction of a percent interest with traditional banks. Start building your 3 months’ salary nest egg in a much higher yielding account.
So to recap, get the maximum out of your employer’s 401k matching program, contribute to an IRA, and start saving in a high yield savings account, and start enjoying financial success!
– Tim Ferro
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7 RESPONSES TO "GEN Y, YOUR 401K IS NOT ENOUGH"
Great post -- my wife and I started contributing to our Roth IRA the year we got married. We were able to max them out the first two years and now do an automatic monthly contribution.
If you're thinking of starting a new retirement fund, NOW is the best time to do it. When stocks are low, you've got the best opportunity to make money.
Tim, great article!! and thanks for the tips =)
To add, once you build up a emergency fund in a high yield savings account, go back to the 401(k) and continue adding more (if you can).
How do you calculate your 3 months salary? Is it your straight salary? Or is it essential living expenses (e.g., food, rent, expenses to search for new job).
@Alex, thanks.
@Daniel, Only go back to your 401k once you have maxed out your IRA contributions, which in 2008 is $5000. Be sure not to contribute more than the 401k max either ($15,500 in 2008).
Secondly, I calculate my 3 month fund as the money that gets deposited into my bank account, but you should probably have more than that because temporary health care is expensive.
This is good information. I'm just about to invest money in my company's 403b, but I'm not planning on staying with the company for too long. I can get that money back when I leave the company, correct? (hopefully this isn't that stupid of a question)
This is all great advice, but it's not nearly enough to secure one's financial future.
Each of us has to maximize our money-making opportunities throughout our careers. If that's having a side business, investing in real estate, or investing in stocks, we must have a cash generating operation outside of our day jobs.
Working at one company is the biggest risk to financial security one can have in this age.
Great advice. I'll also add that it's important to open an IRA early because you cannot catch up on missed contributions. Some people worry they don't know how to invest so they don't open one. That's a fear based on misconception--an IRA is an account, not an investment. So put the money in, and you can still figure out how to invest it later.
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