How to Save and Invest in a 401k or 403b

Many companies offer 401k plans that let you increase your savings for retirement through payroll deduction (nonprofits offer a 403b plan). Your contributions can reduce your taxes now and grow tax-free until you retire.

Instructions

Difficulty: Moderately Easy

1. Ask your employee benefits office to provide you with information on pension and retirement plans, or make an appointment to speak with a benefits representative. Many firms provide a 401k plan, but your employer may offer other arrangements.
2. Carefully read all the information, especially the terms and conditions of any agreement forms, disclosure statements or limited-liability contracts you must sign to participate.
3. Determine what percentage of your gross income you can afford to divert from your paycheck to the plan. Find out if your plan allows borrowing or penalty-free withdrawals in case of hardship.
4. Rank the savings and investment choices available to you from 'least risky' to 'most risky' and decide the level of risk you want to take.
5. Allocate your investment among savings and investment choices in the plan as a percentage (e.g., 50 percent money market, 30 percent mutual fund, 20 percent bond fund) according to your tolerance for risk and your investment goals.
6. Complete and sign all of the necessary paperwork authorizing the payroll department to redirect your chosen amount of gross salary to your retirement savings plan.
7. Review your investment plan and allocations quarterly, and know when you can make changes.

Tips & Warnings

• Some employers match a percentage of your contribution.
• Consider riskier investment choices with higher gains potential if you anticipate other sources of retirement income, including Social Security, company or military pension plans, or a family inheritance.
• If the plan requires you to invest a portion of your contribution in company stock, that portion of your account could be worthless if the company goes broke.
• If you are not fully vested in the plan, you may not be able to transfer all of the funds in your account to a new employer.